<PAGE>
EXHIBIT 13
[LOGO] Pall Corporation
Pall is
everywhere
2000 Annual Report
Filtration. Separation. Solution.(sm)
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[graphic omitted]
where you
work
http://www.pall.com/micro
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[graphic omitted]
where you
play
http://www.pall.com/marine
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[graphic omitted]
where you
heal
http://www.pall.com/blood
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[graphic omitted]
where you
live
http://www.pall.com/water
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[graphic omitted]
where you
discover
http://www.pall.com/biotech
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[graphic omitted]
where you
click
http://www.pall.com/ecommerce
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"Our vision is that
one day all fluids
will pass through
a Pall-engineered
membrane system."
Eric Krasnoff
Chairman and
Chief Executive Officer
6
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Pall Corporation -- Serving Growing Markets Where Filtration is Essential
and Critical
Pall Corporation's business is solving complex contamination problems. Every
manufacturer, municipal water supplier, airline, laboratory, hospital and blood
center is a potential Pall customer. Collectively they share a need to be
profitable, efficient and environmentally responsible producers of high-quality
products and services. Contamination is their common enemy. Left undetected or
unchecked, it can destroy high-value products, raise warranty costs, shut down
plants, violate government regulations, limit or slow innovation, and in certain
markets, expose consumers to considerable health and safety risks. Its
consequences can be measured in hard dollars.
Our vision is that one day all fluids will pass through a Pall-engineered
membrane system. Pall is the broadest-based filtration, separations and
purifications company in the world and serves more markets with more proprietary
products than any other company in the $31 billion filtration industry. Yet our
broad product offering is just one component of our strength. Of equal value to
customers is our ability to select or design the optimal solution for their
always vexing, sometimes unique, contamination challenges and then to work with
them on their implementation.
We serve global customers in two major markets: Health Care and Industrial. Our
business is organized around four market segments: BioPharmaceuticals, Medical,
Aeropower and Fluid Processing. Pall's proprietary products are used to
discover, develop and produce pharmaceuticals, produce safe drinking water,
protect patients, enhance the quality and efficiency of manufacturing processes,
keep equipment running efficiently and to protect the environment.
We actively seek only those applications in which Pall products can make a
substantial difference to customers. Our commitment to the science of filtration
is to continually push the envelope of what is possible -- testing the limits of
scientific, technical and service achievement. Our employees are fervent in
their determination to "always do what's right for the customer." This single
strategic direction, above all others, is vital to our ongoing success.
Financial Highlights:
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Years Ended
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(In thousands, except per share data) July 29, 2000 July 31, 1999
-------------------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Net Sales $ 1,224,101 $ 1,147,066
Earnings Before Income Taxes $ 188,404 $ 58,904
Net Earnings* $ 146,636 $ 51,507
Earnings Per Share* $ 1.18 $ .41
Total Assets at Year End $ 1,507,252 $ 1,488,327
Stockholders' Equity $ 761,306 $ 730,664
Average Shares Outstanding 123,810 124,329
Equity Per Share Outstanding at Year End $ 6.18 $ 5.88
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*Excluding restructuring and other charges, net earnings in fiscal 2000 and 1999
were $154.4 million, or $1.24 per share, and $115.0 million, or 92 cents per
share, respectively.
7
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Eric Krasnoff
Chairman and [PHOTOS OMITTED]
Chief Executive Officer
Jeremy Hayward-Surry
President
Dear Fellow Shareholders:
Fiscal year 2000 saw broad improvement across virtually all fronts. We set our
sights high and achieved or exceeded every goal we established. Sales increased
about $100 million, or 8 1/2% in local currency. Excluding restructuring and
other charges, earnings were up 34%. Return on equity moved from 14.8% to 20.6%.
Operating profit surged from 19.7% to 22.5%. By most any measure, we had an
excellent year.
But I am not satisfied. The ultimate measure of our success is the price of Pall
stock and this has not appreciated in line with our performance. Our efforts
are focused on rectifying this anomaly.
Fiscal 2000 was a year to consolidate the benefits of our March 1999
restructuring which included reductions in headcount and expenses totalling $50
million per annum. The positive effects of that restructuring continue to
reverberate throughout the organization. This difficult and far-reaching effort
brought Pall's SG&A and headcount in line with our opportunities. The effects
were immediate and dramatic. Our focus in fiscal 2001 will be on top-line
growth. Pall has tremendous margin leverage that will benefit from a ramp-up in
sales.
There are major growth opportunities in each of our markets. For every technical
revolution, there is a filtration revolution. It is the purity of raw materials
and manufacturing
8
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processes that enable tomorrow's breakthrough products. Microelectronics is
exemplary of this. Today's semiconductors would not exist without advanced
filtration. Filtration is also integral to the discovery and production of
life-saving drugs and to the production of safe drinking water, to name just a
few. Let's look at a couple of examples.
There is no better place to start than blood banking. Pall blood filters for the
removal of dangerous donor white cells are at the center of a medical
revolution. Routine blood filtration is becoming the standard of care throughout
the world. Most recently, Germany mandated routine filtration of all blood
components, bringing the total number of countries with national filtration
policies to ten. Thirteen others, including the US, are moving toward universal
blood filtration without mandate. In the US, filtration has increased from 17%
just two years ago, to nearly half today. The American Red Cross, which manages
almost half of the US blood supply, has publicly stated its intention to filter
all of its blood collections by the end of the year.
We now expect that all donor blood in the modern medical world will be filtered
prior to transfusion by 2004. Our efforts to improve blood safety will not stop
there. We are on track with our technology partner, V.I. Technologies, to be the
first to commercialize pathogen inactivation technologies for red cells. Red
cells are the most frequently transfused blood component and this project
represents a $4 billion target of opportunity. The program has been cleared by
the FDA to begin Phase II clinical trials. Coupled with Pall's leukocyte
reduction technology, pathogen inactivation represents the most significant
safety advance in the history of the world's blood supply.
Another blockbuster opportunity is in filtration of municipal drinking water.
Numerous well-publicized contamination outbreaks, each with tragic consequences,
underscore the fragile nature of drinking water, and the inadequacy of older
technologies as treatment methods. Our advanced membrane filtration systems
remove pathogens such as E coli, Cryptosporidium and Giardia from drinking water
and are designed to meet the newest US EPA standards. The need for pure water
also exists on-board ships and within hospital surgical and patient care units.
Pall is making significant inroads into these new markets.
In an organization of our size and complexity, there are many small actions and
initiatives that add up to big gains. That is certainly the case for us. We
recently made three key strategic changes that opened up opportunities for many
smaller, incremental improvements both in this past year and for years to come.
We set our sights
high and achieved or
exceeded every goal
we established.
9
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Our markets are vibrant and
require the technical innovation
that is Pall's hallmark.
First, the development and consolidation of our global manufacturing structure
is complete. We now have one global manufacturing company organized around
market-focused divisions. We have strengthened Corporate Purchasing and
Information Technology, and have developed a growing supply chain management
competency to consolidate and support the activities of each of our
manufacturing divisions. This will reduce Cost of Sales and greatly improve
service levels in the years to come.
Cost of Sales trended down in the year despite modest inflation in many raw
materials. Our efforts to attack costs are continuous. These include the
compounding benefits from the new manufacturing organization. Beyond these
improvements, we are also closing three manufacturing operations in fiscal 2001
and consolidating other operations. We took a modest restructuring charge of $11
million in our fourth quarter in connection with this effort. Savings totalling
$10 million are expected to be achieved over two years.
The second contributor to fiscal 2000 was the reorganization of the
BioPharmaceuticals segment. The Specialty Materials and Laboratory Products
divisions were joined with the Critical Care (medical products excluding blood)
division to create a new Critical Filtration focus within the Health Care Group.
Serving an overlapping customer base with many common products, this new group
is both more efficient internally and more potent competitively. The stand-alone
BioPharmaceuticals Group is now focused fully on the pharmaceutical and nascent
biotechnology markets and posted 10% local currency growth in the fourth
quarter.
A key part of the BioPharmaceuticals segment realignment was the transfer of our
Food and Beverage division into the Industrial group. Food and Beverage has been
growing on the cusp of a successful initiative to apply our industrial systems
know-how to the challenging filtration needs of this market. Moving Pall's
industrial systems design and service under the umbrella of a global engineering
group positions us as the most able supplier of filtration systems in our
industry. This extensive re-engineering of our Systems business is a significant
driver for improved profitability and increased sales. The last piece of our
organizational puzzle was put in place in the first quarter of 2001 with the
consolidation of the Aeropower and Fluid Processing groups under a common
banner, Pall Industrial. The basic alignments of our Aeropower and Fluid
Processing segments had not changed in 25 years. Yet our markets, products,
distributors and, most fundamentally, our customers
10
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have. Putting them together improves our already formidable competitive
position. Internally, it means more Pall people focused on selling more products
to common customers with the full resources of Pall Corporation behind them.
Externally, it delivers on the promise that customers have one-stop access to
all Pall technologies and services. Our diversity of technologies and our size
are sustainable competitive advantages. This realignment capitalizes on these
strengths. We are now positioned to move forward with powerful Health Care and
industrial businesses of roughly equal size.
Pall's Board of Directors is losing one of its stalwart contributors in
November. Chet Seibert will retire after 49 years of service to Pall, first as
an executive and for the past 29 years, as a Director. Chet has been an integral
part of our success and we thank him for all of his efforts.
Dr. Edward Snyder has been nominated to join Pall's Board. Ed is a distinguished
physician and blood banker. He is, among many honors, a past President of the
American Association of Blood Banks, on the editorial board of the journal
Transfusion, and the author or coauthor of hundreds of academic and research
papers. He is one of those rare physicians equally at home in the halls of a
hospital and in the halls of Congress. We are fortunate that he has agreed to be
nominated to our Board.
We have set aggressive goals for fiscal 2001. In addition to continuing to focus
on cost reduction programs, we are looking for local currency top-line growth in
the range of 8-10%; for gross margins to remain at least the same; and to reduce
SG&A at least 1% as a percentage of sales.
About one quarter of Pall's sales are in countries tied to the Euro. At current
exchange rates, this could reduce our sales by close to 4%. Fortunately many of
our costs in Europe are also reduced by a weak Euro. The weak British Pound also
reduces our exposure as most Pall sales to Europe are manufactured in England.
This provides a natural hedge and helps to preserve profitability. We are
hopeful that recent support for the Euro will continue to reverse its decline.
The outlook for Pall is bright. Our balance sheet is strong. Our markets are
vibrant and require the technical innovation that is Pall's hallmark. The new
product pipeline is stocked and producing as at no time in our history. Our plan
is working. Pall is clearly in the right place at the right time.
/s/ Eric Krasnoff
-------------------------------
Eric Krasnoff
Chairman and Chief Executive Officer
11
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Pall At A Glance
<TABLE>
<CAPTION>
Breakdown of Sales: Sales by Market Segment:
(amounts in millions) (amounts in millions)
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<S> <C> <C> <C> <C> <C>
71% BioPharmaceuticals pie chart
2000 Sales: $237.2 omitted
1999 Sales: $238.3
[The following tables were depicted as a bar graph in the printed material]
Health Care: $332.7 $332.6 27%
BioPharmaceuticals 99 00 (Percent of Company Revenue)
18% Food & Beverage
[GRAPHIC OMITTED] 2000 Sales: $59.7
1999 Sales: $54.8
11% Specialty Materials
2000 Sales: $35.7
1999 Sales: $39.6
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[The following tables were depicted as a bar graph in the printed material]
Health Care: $272.9 $298.4 25% 29% Critical Care pie chart
Medical 99 00 (Percent of Company Revenue) 2000 Sales: $87.3 omitted
1999 Sales: $86.6
[GRAPHIC OMITTED]
71% Blood
2000 Sales: $211.1
1999 Sales: $186.3
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[The following tables were depicted as a bar graph in the printed material]
Industrial: $267.0 $270.9 22% 49% Aerospace pie chart
Aeropower 99 00 (Percent of Company Revenue) 2000 Sales: $134.1 omitted
1999 Sales: $135.6
[GRAPHIC OMITTED]
51% Industrial Hydraulics
2000 Sales: $136.8
1999 Sales: $131.4
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[The following tables were depicted as a bar graph in the printed material]
Industrial: $274.5 $322.2 26% 32% Microelectronics pie chart
Fluid Processing 99 00 (Percent of Company Revenue) 2000 Sales: $103.7 omitted
1999 Sales: $62.6
[GRAPHIC OMITTED]
68% Industrial Process
2000 Sales: $218.5
1999 Sales: $211.9
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12
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Market Description
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Pall BioPharmaceuticals provides critical filtration and drug validation
services to traditional pharmaceutical customers and to the growing
biotechnology industry. Producers of diagnostic tests and users of
laboratory-scale filtration devices also use Pall products. Filtration
applications within the biopharmaceuticals industry represent a $4 billion
market opportunity.
Pall BioPharmaceuticals provides the broadest range of advanced filtration
solutions for each critical stage of drug development and production, from the
R&D lab through full-scale pharmaceutical production. Pall's products and
regulatory support services enable pharmaceutical producers to reduce their
product development times and costs and get important new drugs to patients
faster. Growth is being fueled by the filtration- dependent biotechnology
industry.
In this industry where nothing can be left to chance, Pall's record of product
performance and innovation has earned the Company preferred supplier status
among leading manufacturers the world over.
--------------------------------------------------------------------------------
Pall's Medical filters provide patients unparalleled protection from leukocyte
and viral contamination, bacteria and particulates stemming from common medical
therapies. Used extensively in blood centers and hospitals for patients
requiring blood transfusions, open-heart surgery, organ transplants, dialysis,
intravenous feeding and breathing therapy, they help to improve patient
outcomes, shorten hospital stays and lower health care costs. Pall Medical
represents a $6 billion business opportunity.
Blood filtration products are the Company's largest product family. Every three
seconds, someone needs a blood transfusion. It is now widely accepted that
leukocytes (white blood cells) in donor blood can cause serious medical
complications. Clinical studies have shown that filtering out white cells
reduces transfusion-related suppression of the immune system and helps protect
against post-surgical infection. Based on medical risk and clinical benefits of
filtration, hospitals and blood centers around the world have been converting to
100% filtered blood. Twenty-three countries are either already filtering all of
their donor blood or moving toward this as a goal. Routine blood filtration is a
legal requirement in many of them.
Pall offers the broadest range of advanced filtration products and support
services to help blood centers meet the challenges of implementing routine,
high-volume, blood filtration.
--------------------------------------------------------------------------------
Pall Aeropower, the Company's oldest business, supplies sophisticated filtration
and fluid monitoring equipment to the aerospace industry for use on commercial
and military aircraft, ships and land-based vehicles. Pall Aeropower also serves
customers in power generation and automotive plants, paper mills, mines, and
many other industrial markets. Pall products help to extend the useful life of
fluids and systems, increase productivity and minimize waste for disposal.
Collectively these markets represent a $3 billion global market.
We are working with the leading companies of the world planning the filtration
and separations systems that will power and control the aircraft, ships and
heavy duty equipment of tomorrow.
--------------------------------------------------------------------------------
Pall's Fluid Processing business is its most diverse and largest market
opportunity at $18 billion. Here, Pall serves producers of oil, gas,
electricity, chemicals, semiconductors, computer terminals, disc drives, thin
film rigid discs, photographic film, food and beverages, municipal water, and
others. Pall's wide range of sophisticated products enhance fluid purity by
removing microscopic and larger contaminants that can devastate production
equipment, product yields and quality.
Two major markets within this large segment are the semiconductor industry and
the rapidly developing municipal drinking water market. Today's sophisticated
computer chips would not exist without Pall's level of filtration. Pall's
advanced products remove contaminants to the parts-per-trillion level, helping
manufacturers to meet their twin goals of high product quality and yields.
Technologies that purify water for use and reuse represent one of the great
business opportunities of the new century. Incredibly only 2% of Earth's water
is fit for consumption. Tough new regulations governing drinking water standards
are being implemented around the world and Pall has quickly become a leading
player.
13
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We develop new products in
step with the semiconductor
industry's furious pace of
innovation. One of them, the
PHOTOKLEEN EZD2 filter
assembly for photoresist
chemicals, minimizes waste
and operator exposure to
aggressive chemicals.
[GRAPHIC OMITTED]
Tsukuba, Japan
Pall Products Make
Semiconductors Possible
The semiconductors that power modern society would not exist without advanced
filtration. Every 18 months, a new generation of chips brings additional
requirements for filtration, separations and purification. With these
contamination-sensitive chips expected to turn up nearly everywhere, this market
represents one of Pall's greatest opportunities for growth both today and
tomorrow.
Playing in this arena requires the ability to meet extraordinarily stringent
technical requirements. As a result, very few do. To be a market leader requires
continuously innovating, anticipating market trends well in advance, investing
accordingly, and managing through its cycles.
The industry this year, returned to explosive growth. Pall's sales outpaced the
industry, increasing 61 1/2% in local currency, and setting a new sales record
from our previous industry high in 1997. With the latest cycle not yet at its
peak, another strong year is expected. We used the prior downturn to strengthen
customer relationships throughout the supply chain, develop a raft of new
products, such as the INFUZOR membrane contactor, and the PHOTOKLEEN EZD2 filter
assembly, and make productivity improvements. Our carefully executed strategy
enabled us to remain profitable in the last downturn, and has strengthened us
for the years ahead. We will continue to invest for the future as this
filtration-dependent market is an indisputable engine of the modern world.
http://www.pall.com/micro
-------------------------
14
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Pall Products Open
New Marine Markets
Innovation in aerospace, throughout manufacturing and in the large mobile
equipment marketplace is on the rise. This is being driven by requirements for
product quality and production efficiency, the tighter tolerances of
sophisticated production equipment and by ever tightening environmental
regulations. Pall's considerable experience in fuel, hydraulic and lubrication
system filtration has become even more valuable to customers in these broad
industrial markets.
Pall's 1998 acquisition of Rochem brought us into the shipboard water
purification business with a new capability to convert salt water to potable
water. What is now Pall's patented DISC-TUBE technology is the system of choice
on yachts, cruise ships and naval ships around the world for the production of
safe, dependable, virus-free drinking water.
Pall's Research and Development organization has built on the original
technology to solve a critical problem plaguing the maritime industry, and with
this, opened a large new market. Grey water is the soapy or greasy water from
ship galleys, laundries and showers. Environmental regulations to protect
fragile coastal ecosystems already limit its discharge, with more far reaching
restrictions expected. Storing it on-board takes valuable space and paying to
have it carted off once in port is expensive. Consider that an aircraft carrier
generates as much as 350,000 gallons of grey water a day. Pall has recently
delivered several grey water systems to new cruise ships and sees growing demand
for this unique technology in the world's military and commercial marine
markets.
http://www.pall.com/marine
--------------------------
[GRAPHIC OMITTED]
Portsmouth, United Kingdom
We sell water treatment
systems for use on-board
ships to produce safe,
virus-free drinking water.
Our DISC-TUBE technology
has also opened the opportunity
for us to protect fragile
coastal ecosystems.
15
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[GRAPHIC OMITTED]
Fajardo, Puerto Rico
We make millions of
advanced filtration products
to help hospitals and blood
centers meet the challenges
of implementing routine,
high-volume blood filtration.
Pall Products Set
New Standards For
Blood Transfusions
Pall is leading the charge to filter the world's blood supply. We acted on our
conviction that the medical community would adopt routine blood filtration as
the standard for safer transfusions. Patients would also demand filtered blood
as they became aware of avoidable health risks. Donor white cells are
responsible for 90% of all transfusion complications. Clinical evidence proves
that they transmit disease, predispose patients to infection and significantly
add to medical costs.
Momentum began building two years ago when entire nations, leading blood centers
and hospitals began to routinely filter donor blood. Today, 30% of the blood
supply in the modern medical world is filtered and demand for Pall filters is
exploding. Universal leukocyte reduction approaching 100% of the blood supply,
is expected to be completed in North America, Europe and Japan by 2004.
Improving standards of medical care in developing nations are creating
additional opportunities for growth. Pall dominates this market with clinically
proven blood filtration technology.
With a vision of an even safer blood supply, we are developing a system to
detect bacteria in platelets, the second leading cause of transfusion-related
deaths. We are also collaborating with V.I. Technologies on the development of
pathogen inactivation technologies, or "sterile blood." This is the Holy Grail
of blood safety. The Companies are working to become the first to market
pathogen inactivation systems for red cells, the most frequently transfused
blood component. Pathogen inactivation products for platelets are also in
development.
http://www.pall.com/blood
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Pall Products Produce High
Quality Drinking Water
A million people in the US alone become sick, and a thousand die every year from
drinking contaminated water. Most at risk are the very young, the elderly and
immunocompromised patients. While massive outbreaks make the news, most cases
are isolated and do not. Conventional water treatment technologies struggle to
meet strict new regulations governing water quality.
Pall targeted the municipal drinking water market four years ago when membrane
filtration was virtually unknown. Sales have more than doubled each year since.
Pall's ARIA brand water treatment systems have proven to produce the highest
quality water at the lowest cost of ownership. Membrane filtration is emerging
as the industry's new technology standard and Pall, which captured almost half
of the US membrane business in fiscal 2000, is a major player. During the year,
Pall R&D launched the SEPTRA CB cryptosporidium filter and the modular ARIA
system for smaller communities.
Looking ahead, we can expect to see global regulators
continue to promote increasingly strict standards for water safety and quality.
In line with this, we are launching our now proven technologies worldwide.
http://www.pall.com/water
-------------------------
[GRAPHIC OMITTED]
Cortland, New York
We designed the ARIA
water treatment system so
that municipalities, both
large and small, can have
the highest quality drinking
water at an affordable price.
17
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We develop products
that enable pharmaceutical
companies to get important
new drugs to patients
faster. Our MUSTANG
technology is a breakthrough
alternative to chromatography columns.
[GRAPHIC OMITTED]
Pensacola, Florida
Pall Products Are In The Race
To Cure Diseases
The pharmaceutical industry epitomizes the ideal Pall market. Global
requirements for our products is continuous and growing. Regulatory requirements
mandate filter use and performance. Customers are technically demanding and
appreciate the importance of filters and the differences between them. New drugs
are the industry's lifeblood, yet its ability to launch them hinges upon its
technology partners' capacity to innovate alongside it. Barriers to entry are
extraordinarily high and Pall, the industry's most versatile and trusted
supplier, has earned very high market share.
While the traditional pharmaceutical industry provides Pall a steady revenue
stream, the emerging biotechnology sector represents significant potential. Pall
has made a number of strategic moves, including the acquisition of Gelman
Sciences in 1997, which positioned us in the research laboratory, right at the
heart of the new industry's development programs. New leading-edge products,
such as ULTIPOR VF DV20 virus filters and MUSTANG ion exchange membranes fulfill
the industry's expanding requirements for product purity and patient safety.
In the US alone, there are 369 biotechnology drugs in development. Most are
aimed at cancer and all are in a race to market. Pall's products and regulatory
support services enable these developers to reduce their development costs, and
get new drugs to patients faster. Pall products are already specified on many of
them. Each requires up to 50 different filtration and purification steps to make
a single batch. Our proven products are ideally suited, and product development
is focused on tomorrow's biotechnology applications. So as the biotechnology
industry grows, Pall's business grows apace.
http://www.pall.com/biotech
---------------------------
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Pall Products Protect Patients
From Contamination
The US Centers for Disease Control estimates two million people acquire
infections in hospitals at a cost of $4.5 billion a year. To make matters worse,
70% of the bacteria that cause them are resistant to at least one of the drugs
most commonly used to treat them. Many in the medical community are placing
greater emphasis on prevention and turning to Pall for expert advice and
products for preventing contamination.
There are myriad sources of infection in modern medicine. Ventilator-associated
pneumonia is common. Filtration minimizes the risk. Modern intravenous therapy
is a powerful medical tool. Filtration enhances its safety and effectiveness.
Recognizing this, drug manufacturers are starting to require filtration at the
time of use. Most surgeons scrub with ordinary tap water. Burn victims and bone
marrow patients bathe in it. This led to Pall's new AQUASAFE water filter, first
launched in Europe and now available in the US. Widespread use of lasers in
surgery created a major opportunity for Pall to solve a growing problem. Pall's
LAPROSHIELD laparoscopic smoke filters are rapidly being adopted to remove the
hazardous smoke and aerosols emitted into surgical suites from laparoscopic
procedures.
Today's Pall products protect patients from contamination. In the future we may
see them being used to treat diseases. Some very exciting and promising work is
underway in which Pall filters are being investigated as therapies for stroke
victims and other serious medical conditions.
http://www.pall.com/medical
---------------------------
[GRAPHIC OMITTED]
Ann Arbor, Michigan
We are using the internet as
a new way to serve our
customers -- whether they
want information or to place
an order. We're working to
make sure global customers
get what they need "24/7."
19
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Financial Contents
21 Management's Discussion and Analysis
of Financial Condition and Results of Operations
25 Consolidated Statements of Earnings
25 Independent Auditors' Report
26 Consolidated Balance Sheets
27 Consolidated Statements of Stockholders' Equity
28 Consolidated Statements of Cash Flows
29 Notes to Consolidated Financial Statements
41 Common Stock Prices and Cash Dividends
41 Six-Year Sales
42 Six-Year Financial History
20
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
2000 Compared to 1999
Review of Consolidated Results
Sales for fiscal 2000 of $1,224.1 million were 6 1/2% higher than the
prior year's sales of $1,147.1 million. Foreign exchange rates and pricing
negatively offset increased sales volume by 2% and 1%, respectively. The
weakening of the European currencies reduced sales by $40.2 million and this was
partially offset by the strength of the Japanese Yen which increased sales by
$18.1 million. The price declines were principally in the blood filter area. Had
exchange rates remained unchanged year over year, and excluding the effect of
the business divested in fiscal 1999, sales increased by $101.8 million, or 9%,
on a comparable basis.
Cost of sales, at 45.3% as a percentage of sales (before the restructuring and
other charges, net discussed below), has improved slightly despite the lower
gross margins on blood filter sales to blood centers. This was largely due to
improvements in Fluid Processing margins. Selling, general and administrative
expenses combined with research and development expenses improved 3.1% when
compared to last year principally due to the restructuring initiated in the
third quarter of fiscal 1999, discussed below.
As part of its continued efforts to reduce costs, in the fourth quarter of
fiscal 2000, the Company implemented a plan to close three U.S. manufacturing
facilities and consolidate certain manufacturing operations as well as to
reorganize its Bio Pharmaceuticals business. As a result of these actions, the
Company recorded a pretax restructuring charge of $11.3 million in the fourth
quarter and expects that the costs associated with these actions will be
recovered within two years through resulting costs savings. Approximately $3.8
million of the charge relates to employee termination benefits and approximately
$1.0 million is for incremental costs and contractual obligations for items such
as lease termination payments and other facility exit costs incurred as a direct
result of the planned closures. The Company expects to terminate approximately
175 employees by the end of fiscal 2001. As of July 29, 2000, approximately 60
employees had been terminated. The charge also includes $3.4 million for
inventory write-downs, which have been classified as a component of cost of
sales, related to the rationalization of product lines. Fixed asset write-offs
were approximately $3.1 million.
Other charges, net represent the write-off of a $2.0 million investment in a
start-up company in the fourth quarter of fiscal 2000 and a gain of $1.3 million
in the first quarter of fiscal 2000 from the sale of a property in the United
Kingdom. After careful assessment of the current status of certain activities
and technologies of the company, management determined it was appropriate to
write-off the investment.
During the third quarter of fiscal 1999, the Company announced and implemented a
plan to restructure its operations with targeted payroll and expense reductions
of over $50 million per annum. The Company initiated the restructuring to bring
operating costs in line with reducing gross margins. The major restructuring
details included:
o consolidation of European inventory warehousing and distribution functions
o restructuring of Japanese operations
o relocation and consolidation of certain manufacturing operations
o rationalization of the research and development and scientific and
laboratory services functions
o realignment of the Medical division sales forces
o reduction in corporate costs
As a result of the restructuring, the Company's global work force was reduced by
approximately 500 people. Upon consolidation of the European inventory
warehousing and distribution functions and restructuring of its Japanese
operations, the Company identified excess inventory that could not be sold
within the normal product life cycle. Consequently, the Company wrote off
inventory of $13.8 million. The total cost related to all restructuring related
activities resulted in a charge of $43.9 million in the third quarter of fiscal
1999.
Along with the restructuring, the Company performed a comprehensive review of
its business. Across all business lines, the review identified instances where
certain products had been superseded by newer products and some excess inventory
that resulted from competitive conditions and adverse changes in product demand.
As a result, the Company wrote off $7.0 million in inventory and provided an
incremental reserve of $4.0 million to reflect current market conditions and
shorter product life cycles. The review also identified write-downs of $27.0
million on certain fixed and other assets, principally to provide for the
impairment of certain patents and licenses that are not fully recoverable due to
lower than anticipated market potential; to reflect further impairment of land
and building held for sale; and, to write-off certain redundant fixed assets
that are no longer used.
In addition, the Company increased its reserve for future environmental
remediation costs for the cleanup of contaminated water at its Ann Arbor,
Michigan facility by $6.0 million because it was anticipated that future
remediation costs would exceed the estimate originally established.
A summary table of the fiscal 1999 charges is included in the notes to the
consolidated financial statements.
Year on year, net interest expense for fiscal 2000 was higher than in fiscal
1999 due to the rise in interest rates that occurred during fiscal 2000
principally related to the Company's notes payable, which accrue interest at
variable rates. This was partially offset by the decrease in the Company's
average debt, net of cash and short-term investments. The underlying tax rate
for fiscal 2000 continues to be 23% as the Company continues to realize the
benefits of lower tax rates in Ireland and Puerto Rico. The Company expects to
maintain this rate through the end of fiscal 2001.
21
<PAGE>
Top-line growth coupled with savings achieved as a result of ongoing cost
reduction efforts can be readily seen in earnings. Net earnings were $146.6
million, or $1.18 per share, compared with net earnings of $51.5 million, or 41
cents per share last year. Excluding the restructuring and other charges, net,
in both years, net earnings amounted to $154.4 million, or $1.24 per share, and
$115.0 million, or 92 cents per share, in fiscal 2000 and 1999, respectively.
Reported net earnings for fiscal 2000 and 1999 include charges equating to 6
cents per share and 51 cents per share (after pro forma tax effect),
respectively. It is estimated that earnings per share in fiscal 2000 decreased
about 4 cents due to the negative effect of foreign currency exchange rates.
Review of Market and Geographic Segments
Medical sales grew by 11% in local currency, despite some pricing reduction due
to the continued shift in mix of sales towards blood centers. Reflecting this
shift, sales to blood centers were up 41% while sales to hospitals declined by
16%; overall blood filter sales increased 14 1/2%. By geography, the same trend
continued in the Western Hemisphere and Europe where sales to blood centers
increased 46% and 35%, respectively, while sales to hospitals declined 23 1/2%
and 11 1/2%, respectively, for overall increases in blood filter sales of 18
1/2% and 17 1/2%, respectively. Blood filter sales in Asia, which declined by 8
1/2%, continue to be primarily to hospitals. On a global basis, sales to blood
centers comprised 65% of total fiscal 2000 blood filter sales, up from 53% in
1999 and 45% in 1998. Critical Care sales increased by 3% driven by growth in
Europe.
After growing 12 1/2% in local currency last year, Bio Pharmaceuticals sales
were flat this year. This was principally due to more systems sales last year
and the temporary closure of some customer plants in fiscal 2000. After a slow
start, the segment showed a return to growth in the fourth quarter with local
currency growth of 10%. During the fourth quarter, the Bio Pharmaceuticals and
Food and Beverage sub-markets grew by 7 1/2% and 33%, respectively, in local
currency, finishing the year with overall growth of 2% and 13%, respectively.
Specialty Materials, the smallest part of the segment, was down 10%.
Aeropower sales growth for the year was 5% in local currency principally
attributable to increased Industrial Hydraulics sales across all geographies. In
the Western Hemisphere and Asia, Industrial Hydraulics sales increased by 13
1/2% and 18%, respectively, and Europe's sales increased 5%. Aerospace sales
were flat for the year, principally due to some military sales in Europe last
year which did not repeat in fiscal 2000.
In local currency, Fluid Processing sales increased by 17 1/2% for the year led
by growth in the Microelectronics sub-market. Microelectronics grew by 61 1/2%
benefiting from the growth in the semiconductor market. Microelectronics sales
were up across all geographies; the Western Hemisphere, Europe and Asia posted
local currency sales growth of 81%, 56 1/2%, and 48%, respectively. Industrial
Process sales grew by 4 1/2% for the year in local currency; excluding the
effect of the business divested in fiscal 1999, the growth on a comparable basis
was 6%. Within Industrial Process, sales increased in the Hydrocarbon, Chemical
and Polymer (9%), Power Generation (22%) and Water (8 1/2%) sub-markets, all
driven by U.S. growth. In the Industrial sub-market, sales decreased 4%. By
geography, Industrial Process sales increased by 14% in the Western Hemisphere
(19% excluding the effect of the business divested in fiscal 1999) and 4 1/2% in
Asia while sales in Europe declined by 4%.
The consolidated operating profit as a percentage of sales for fiscal 2000
(before restructuring and other charges, net) grew to 22.5% compared to 19.7%
for 1999, benefiting from the restructuring initiated in the third quarter of
1999. In Medical, the operating profit increased from 26.6% to 28.1% reflecting
the combined benefits of increased sales volumes for blood filters, profit
recognized from an unfulfilled supply agreement and the restructured selling
organization, partially offset by a price decline in the blood filter area. Bio
Pharmaceuticals' profit improved by 5.6% to 22.9% due to the joint effect of
reduced systems sales and the reorganization of the segment. The profit rate in
Aeropower came in at 25.1% which was a 1.1% improvement over 1999. Fluid
Processing, driven by increased Microelectronics sales and improved margins in
systems business, increased its profit from 11.7% to 14.5%.
By geography, Western Hemisphere sales increased 11 1/2% mainly led by growth
in Medical and Fluid Processing. In Europe, reported sales decreased by 4 1/2%
and in local currency, sales increased 4 1/2%, reflecting the negative impact of
the weak Euro on sales. Reported sales in Asia, which benefited from the strong
Yen, increased 21% and in local currency, sales increased 10 1/2% fueled by
growth in Microelectronics and overall growth in Japan and Korea. The operating
profit in the Western Hemisphere increased by 6.9% to 27% due to the
double-digit increase in sales, as well as the benefits of last year's
restructuring. Europe's profit exceeded 21%, but was less than last year,
primarily due to the effects of exchange rates. Sales growth in Asia has
increased the operating profit from 10.0% to 16.3%.
1999 Compared to 1998
Review of Consolidated Results
Sales for fiscal 1999 increased by 4 1/2% in local currency to $1,147.1 million
from $1,087.3 million in fiscal 1998. Foreign exchange rates increased sales by
1%; however pricing decreased sales by 1%. The acquisition of Rochem in fiscal
1998 increased current year sales by about 1%.
Year on year, cost of sales as a percentage of sales (before restructuring and
other charges, net discussed below) increased by 1.5% mainly due to lower gross
margins on increased blood filter sales to blood centers, and lower margins on
Microelectronics and Industrial systems sales. Selling, general and
administrative expenses and research and development expenses, as a percentage
of sales decreased by 1.2% principally due to the restructuring that was
implemented during the third quarter of fiscal 1999.
During the third quarter of fiscal 1999, the Company announced and implemented a
plan to restructure its operations with targeted payroll and expense reductions
of over $50 million per annum.
22
<PAGE>
The Company initiated the restructuring to bring operating costs in line with
reducing gross margins. The major restructuring details are included in the
discussion above which compares fiscal 2000 to fiscal 1999.
During the third quarter of fiscal 1999, the Company adopted the AICPA's
Statement of Position 98-5, Reporting the Costs of Start-Up Activities,
retroactive to the beginning of the fiscal year. As a result, previously
capitalized start-up costs of approximately $5,767 were expensed and recorded in
cost of sales. The effect of adopting this statement resulted in charges of
$1,567 and $4,200 in the first and second quarters of fiscal 1999, respectively.
Other charges, net for fiscal 1998 represent a $27 million write-off
of in-process research and development acquired in connection with the Company's
purchase of Rochem and non-recurring income of $13.5 million related to the
payment by Micron Separations Inc. to Pall in settlement of patent litigation,
net of certain one-time costs.
Year on year, net interest expense for fiscal 1999 was higher than in fiscal
1998 as the Company's average debt, net of cash and short-term investments, was
also higher for the same period; the weighted average borrowing rate for fiscal
1999 and 1998 was about the same. The underlying tax rate for fiscal 1999 was
23% compared to 25% in 1998. The decrease in the tax rate reflects reductions in
the statutory tax rates in the United Kingdom, Germany and Japan, as well as an
increase in products manufactured in Puerto Rico and Ireland, which have lower
tax rates.
For fiscal 1999, net earnings, excluding the restructuring and other charges,
net and the effect of adopting the new accounting standard, were $119 million or
95 cents per share compared to $116 million or 92 cents per share in fiscal
1998. The reported net earnings amounted to $52 million or 41 cents per share
for fiscal 1999 compared to $94 million or 75 cents per share in fiscal 1998.
The reported net earnings for fiscal 1999 include a charge of 51 cents per share
(after pro forma tax effect) related to the restructuring and one-time charges
mentioned above. The earnings for fiscal 1999 also include a charge of 3 cents
per share (after pro forma tax effect) to write-off previously capitalized
start-up costs retroactive to the beginning of fiscal 1999. The reported
net earnings for fiscal 1998 include 17 cents per share (after pro forma tax
effect) of other charges, net.
Review of Market and Geographic Segments
Sales in the Medical market increased 4% in local currency. Growth in this
market was affected by price reductions in blood filters of about 5%.
Sequentially, the Company has seen prices stabilize over the last three
quarters. Sales to blood centers were up 22% reflecting the shift away from
sales to hospitals; blood filter sales to hospitals declined by 11%. Year on
year, blood filter sales increased 4 1/2% in local currency. By geography,
Europe's sales to blood centers increased 46% as more and more countries began
to adopt universal blood filtration; blood filter sales to hospitals in Europe
declined by 24%. In the Western Hemisphere, blood filter sales to blood centers
increased 13% reflecting momentum towards universal filtration. Blood filter
sales to hospitals declined by 11%. In Asia, where the majority of the blood
filter sales were to hospitals, sales increased 7%. On a global basis, blood
filter sales to blood centers now represent 53% of total blood filter sales,
compared to 45% in fiscal 1998. Critical Care sales increased 3% in local
currency.
Sales in the BioPharmaceuticals market increased by 12 1/2% in local currency.
Across all sub-markets, sales increased in double-digits. By geography,
BioPharmaceuticals segment sales grew 8% in the Western Hemisphere, 14% in
Europe and 24% in Asia.
Sales in the Aeropower market increased by 3% led by 8 1/2% growth in the
Aerospace sub-market and a 2 1/2% decline in Industrial Hydraulics. Within
Aerospace, military sales increased by 17% and commercial sales increased by 3%.
The split between military and commercial sales is 45% and 55%, which is about
the same as in fiscal 1998. By geography, military aerospace sales increased by
18% in the Western Hemisphere and 21% in Europe. Industrial Hydraulics sales in
the Western Hemisphere declined by 17% but increased in Europe by 5%. Sales in
Asia were flat.
Sales in the Fluid Processing market decreased by 1% in local currency. Sales
increased 12 1/2% in the traditional Industrial Process area; however, this
increase was offset by a 30% decrease in Microelectronics sales and the sale of
the Well Technology division. Across all geographies, Microelectronics sales
decreased by about 30%. In the Industrial Process sub-market, sales to
Hydrocarbon, Chemical and Polymer ("HCP") customers increased by 16% and sales
to Power Generation customers increased by 18%. Sales to customers in the Water
division increased by 105%. Across geographies, sales in the Industrial Process
market for Europe increased by 45%, led by the Water division, up 81%; HCP, up
59%; and Power Generation, up 25%. Sales in the Western Hemisphere declined by
6%; this was mainly due to the sale of the Well Technology division. Industrial
Process sales in Asia increased by 3%.
The consolidated operating profit as a percentage of sales (before restructuring
and other charges, net) for fiscal 1999 was 20.2% compared to 20.4% in fiscal
1998. By market, the operating profit for Medical is about the same as in fiscal
1998; the decrease in prices was offset by the benefits resulting from the
restructuring that took place in the Medical division as well as the substantial
increase in sales volume. The increase in BioPharmaceuticals' operating profit
level is mainly due to increased volume as mentioned above. The operating profit
in the Fluid Processing market declined by 3.2% reflecting lower margins on
Microelectronics and Industrial systems sales.
Sales in the Western Hemisphere decreased by 1% mainly due to the sale of the
Well Technology business and reduction in Microelectronics sales. Sales in
Europe increased by 13 1/2% as all the principal markets experienced
double-digit growth. Sales in Asia increased by 2% mainly due to sales increases
in the BioPharmaceuticals and Medical markets; this increase was partially
offset by a decrease in Microelectronics sales. By geography, the operating
profit in the Western Hemisphere declined by 1.1% mainly as a result of the
shift of blood filter sales from hospitals to blood centers and reduced margins
on Microelectronics sales. In Europe, the operating profit improved slightly.
The operating
23
<PAGE>
profit rate in Asia increased by 1.4% mainly as a result of the improving
economic situation in the Asian countries.
Liquidity and Capital Resources
The Company's balance sheet is affected by spot exchange rates used at the end
of fiscal 2000 for translating local currency amounts into U.S. dollars. In
comparing spot exchange rates at the end of last year, the European currencies
have weakened against the U.S. dollar, whereas the Asian currencies (especially
the Yen) have strengthened against the U.S. dollar.
Debt and short-term borrowings, net of cash and short-term investments,
decreased by $44 million during the year. Net debt as a percentage of net debt
and equity decreased to 27% at the end of fiscal 2000 from 30% at the end of
fiscal 1999. On August 29, 2000, the Company completed a $100 million private
placement of 7.83% unsecured senior notes due in 2010. In addition, on August
30, 2000, the Company closed a $200 million unsecured senior revolving credit
facility, of which $150 million expires in 2005 and $50 million renews annually.
Borrowings under this facility bear interest at a floating rate based upon
LIBOR. The agreements contain various covenants, including financial covenants
pertaining to interest coverage, funded debt and minimum net worth. As a result
of these transactions, U.S. dollar denominated lines of credit amounting to $230
million were canceled and the immediate credit availability of the Company
increased $70 million. Additionally, approximately $170.2 million of U.S. dollar
denominated short-term notes payable have been classified as long-term debt in
the balance sheet as of July 29, 2000 thereby significantly increasing the
Company's working capital.
The Company purchased approximately $30 million of its shares with cash
generated from operating cash flows. During the fourth quarter, the Company
completed the $150 million stock buy-back authorized by the Company's Board of
Directors on October 6, 1997 which was extended by the Board of Directors on
January 20, 2000 by three years with an authorization to expend up to another
$200 million. At July 29, 2000, $194.8 million of the most recent authorization
remains to be expended.
Capital expenditures and depreciation and amortization for the year were $66.5
million and $72 million, respectively. The Company also spent approximately $15
million to purchase a new manufacturing facility, equipment and certain other
assets from Laboratory SpA, a publicly traded company in Italy, in order to meet
the increasing worldwide demands for its blood product systems. The Company
anticipates that it will spend approximately $90 to $95 million for capital
expenditures in fiscal 2001. The Company considers its existing lines of credit
along with the cash it generates from operations to be sufficient for its future
growth.
Other Matters
Euro Currency Conversion
A new European currency (Euro) was introduced in January 1999 to replace the
separate (legacy) currencies of eleven individual countries. This will entail
changes in our operations as we modify systems and commercial arrangements to
deal with the new currency. Modifications will be necessary in operations such
as payroll, benefits and pension systems, contracts with suppliers and customers
and internal financial reporting systems. A three-year transition period is
expected during which transactions can be made in the legacy currencies. This
may require dual currency processes for our operations. We have identified
issues involved and are developing and implementing solutions. The cost of this
effort is not expected to have a material effect on our business or results of
operations. There is no guarantee, however, that all problems will be foreseen
and corrected, or that no material disruption of our business will occur. The
conversion to the Euro may have competitive implications on our pricing and
marketing strategies; however, any such impact is not known at this time.
Currently, about 25% of the Company's sales are in countries that have adopted
the Euro.
Accounting Standards Not Yet Adopted
The Financial Accounting Standards Board issued Statement No. 133 related to
Accounting for Derivative Instruments and Hedging Activities. In fiscal 2001,
the Company will adopt this statement, which is not expected to have a material
impact on the Company's consolidated financial statements.
Risk Management
The Company considers its foreign operations to be of major importance to its
future growth prospects, and does not believe the risk of its foreign business
differs materially from its domestic business, except for the risk of currency
fluctuations. Inasmuch as changes in foreign currency rates affect the Company's
operations around the world, the Company monitors them closely and takes
necessary steps to minimize the risk that this will materially affect its
financial statements; some of these measures include hedging balance sheet
exposures through forward exchange contracts and borrowing in local currency,
monitoring of customers' account balances and assessment of customers' financial
strength. In addition, the Company's diverse manufacturing and customer base
limits its exposures so that any one event is not likely to have a material
impact on its financial statements.
24
<PAGE>
Consolidated Statements of Earnings
Pall Corporation and Subsidiaries
<TABLE>
<CAPTION>
Years Ended
----------------------------------------------------------------------------------------------------
(In thousands, except per share data) July 29, 2000 July 31, 1999 August 1, 1998
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Net sales $1,224,101 $1,147,066 $1,087,285
Costs and Expenses:
Cost of sales 557,720 548,006 473,859
Selling, general and administrative expenses 403,900 405,956 392,809
Research and development 51,434 56,490 58,540
Restructuring and other charges, net 8,566 64,695 19,222
Interest expense, net 14,077 13,015 7,870
--------------------------------------------------------------------------------------------------
Total Costs and Expenses 1,035,697 1,088,162 952,300
--------------------------------------------------------------------------------------------------
Earnings Before Income Taxes 188,404 58,904 134,985
Provision for income taxes 41,768 7,397 41,352
--------------------------------------------------------------------------------------------------
Net Earnings $ 146,636 $ 51,507 $ 93,633
--------------------------------------------------------------------------------------------------
Earnings Per Share:
Basic $ 1.18 $ 0.41 $ 0.75
Diluted $ 1.18 $ 0.41 $ 0.75
--------------------------------------------------------------------------------------------------
Average Shares Outstanding:
Basic 123,810 124,329 125,070
Diluted 124,709 124,755 125,681
==================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Independent Auditors' Report
Board of Directors
Pall Corporation:
We have audited the accompanying consolidated balance sheets of Pall Corporation
and subsidiaries as of July 29, 2000 and July 31, 1999, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the years in the three-year period ended July 29, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pall Corporation and
subsidiaries as of July 29, 2000 and July 31, 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended July 29, 2000, in conformity with accounting principles generally accepted
in the United States of America.
/s/ KPMG LLP
Melville, New York
August 30, 2000
25
<PAGE>
Consolidated Balance Sheets
Pall Corporation and Subsidiaries
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) July 29, 2000 July 31, 1999
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 81,008 $ 86,677
Short-term investments 60,700 50,500
Accounts receivable, net of allowances for doubtful accounts
of $7,832 and $6,623, respectively 337,806 326,197
Inventories 202,959 205,867
Prepaid expenses 21,946 21,723
Deferred income taxes 26,137 33,412
Other current assets 22,620 19,813
----------------------------------------
Total Current Assets 753,176 744,189
------------------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment:
Land 30,003 30,341
Buildings and improvements 321,629 323,452
Machinery and equipment 518,650 500,494
Furniture and fixtures 62,566 66,176
Transportation equipment 14,782 15,565
----------------------------------------
947,630 936,028
Less: Accumulated depreciation and amortization 443,875 429,012
----------------------------------------
Property, Plant and Equipment, Net 503,755 507,016
----------------------------------------
Other Assets 250,321 237,122
------------------------------------------------------------------------------------------------------------------------
Total Assets $1,507,252 $1,488,327
========================================================================================================================
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable $ 112,543 $ 301,647
Accounts payable 68,419 63,525
Accrued liabilities:
Salaries, commissions and related payroll taxes 55,559 51,032
Pension and profit sharing plans 21,073 17,418
Other 48,670 47,133
----------------------------------------
125,302 115,583
Income taxes 31,055 20,147
Current portion of long-term debt 80,002 37,506
Dividends payable 20,358 19,871
----------------------------------------
Total Current Liabilities 437,679 558,279
----------------------------------------
Long-term Debt, Net of Current Portion 223,915 116,815
Deferred Income Taxes 20,995 21,232
Other Non-Current Liabilities 63,357 61,337
------------------------------------------------------------------------------------------------------------------------
Total Liabilities 745,946 757,663
------------------------------------------------------------------------------------------------------------------------
Stockholders Equity:
Common stock, par value $.10 per share; 500,000 shares authorized;
127,958 shares issued 12,796 12,796
Capital in excess of par value 103,935 96,811
Retained earnings 793,491 729,052
Treasury stock, at cost (2000--4,840 shares, 1999--3,748 shares) (104,625) (82,283)
Stock option loans (5,584) (7,216)
Accumulated other comprehensive loss:
Foreign currency translation (33,350) (12,149)
Minimum pension liability (1,271) (1,937)
Unrealized investment losses (4,086) (4,410)
----------------------------------------
(38,707) (18,496)
------------------------------------------------------------------------------------------------------------------------
Total Stockholders Equity 761,306 730,664
------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $1,507,252 $1,488,327
========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
Consolidated Statements of Stockholders' Equity
Pall Corporation and Subsidiaries
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
(In thousands)
Capital in Stock
Years Ended August 1, 1998, Common Excess of Retained Treasury Option
July 31, 1999 and July 29, 2000 Stock Par Value Earnings Stock Loans
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at August 2, 1997 $12,796 $92,893 $749,923 $(12,837) $(8,820)
Comprehensive income:
Net earnings 93,633
Other comprehensive (loss) income:
Translation adjustment
Minimum pension liability
Unrealized investment gains
Comprehensive income
Cash dividends declared (75,501)
Issuance of 488 shares for stock plans 479 (3,607) 10,554
Purchase of 3,928 shares (84,998)
Stock option loans 1,680
---------------------------------------------------------------------------------------------------------------------
Balance at August 1, 1998 12,796 93,372 764,448 (87,281) (7,140)
Comprehensive income:
Net earnings 51,507
Other comprehensive (loss) income:
Translation adjustment
Minimum pension liability
Unrealized investment losses
Comprehensive income
Cash dividends declared (78,980)
Issuance of 2,087 shares for stock plans 3,439 (7,923) 45,202
Purchase of 1,796 shares (40,204)
Stock option loans (76)
---------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1999 12,796 96,811 729,052 (82,283) (7,216)
Comprehensive income:
Net earnings 146,636
Other comprehensive (loss) income:
Translation adjustment
Minimum pension liability
Unrealized investment gains
Comprehensive income
Cash dividends declared (81,179)
Issuance of 354 shares for stock plans 16 (1,018) 7,637
Restricted stock units related to
the MSPP 5,059
Proceeds from the sale of put options 2,049
Purchase of 1,446 shares (29,979)
Stock option loans 1,632
---------------------------------------------------------------------------------------------------------------------
Balance at July 29, 2000 $12,796 $103,935 $793,491 $(104,625) $(5,584)
=====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
(In thousands) Accumulated
Other
Years Ended August 1, 1998, Comprehensive Comprehensive
July 31, 1999 and July 29, 2000 (Loss Income Total Income
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at August 2, 1997 $(9,122) $824,833
Comprehensive income:
Net earnings 93,633 $93,633
Other comprehensive (loss) income:
Translation adjustment (5,694) (5,694) (5,694)
Minimum pension liability 286 286 286
Unrealized investment gains 3,950 3,950 3,950
---------------
Comprehensive income $92,175
===============
Cash dividends declared (75,501)
Issuance of 488 shares for stock plans 7,426
Purchase of 3,928 shares (84,998)
Stock option loans 1,680
----------------------------------------------------------------------------------
Balance at August 1, 1998 (10,580) 765,615
Comprehensive income:
Net earnings 51,507 $51,507
Other comprehensive (loss) income:
Translation adjustment (1,734) (1,734) (1,734)
Minimum pension liability 2,125 2,125 2,125
Unrealized investment losses (8,307) (8,307) (8,307)
---------------
Comprehensive income $43,591
===============
Cash dividends declared (78,980)
Issuance of 2,087 shares for stock plans 40,718
Purchase of 1,796 shares (40,204)
Stock option loans (76)
----------------------------------------------------------------------------------
Balance at July 31, 1999 (18,496) 730,664
Comprehensive income:
Net earnings 146,636 $146,636
Other comprehensive (loss) income:
Translation adjustment (21,201) (21,201) (21,201)
Minimum pension liability 666 666 666
Unrealized investment gains 324 324 324
---------------
Comprehensive income $126,425
===============
Cash dividends declared (81,179)
Issuance of 354 shares for stock plans 6,635
Restricted stock units related to
the MSPP 5,059
Proceeds from the sale of put options 2,049
Purchase of 1,446 shares (29,979)
Stock option loans 1,632
----------------------------------------------------------------------------------
Balance at July 29, 2000 $(38,707) $761,306
==================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
Consolidated Statements of Cash Flows
Pall Corporation and Subsidiaries
<TABLE>
<CAPTION>
Years Ended
-----------------------------------------------------------------------------------------------------------------------------------
(In thousands) July 29, 2000 July 31, 1999 August 1, 1998
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net earnings $146,636 $51,507 $93,633
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Restructuring and other charges, net 11,987 77,957 27,000
Depreciation and amortization of property, plant and equipment 63,380 64,857 64,587
Amortization of intangibles 8,581 9,914 8,492
Deferred income taxes 2,698 (16,134) (19,932)
Provision for doubtful accounts 2,468 1,891 1,915
Changes in operating assets and liabilities, net
of effects of acquisitions:
Accounts receivable (29,228) (31,861) (20,159)
Inventories (10,794) (7,474) (31,351)
Other assets (14,804) (13,225) 17,722
Accounts payable 6,762 (6,974) 10,714
Accrued expenses 13,596 (4,188) 8,269
Income taxes payable 11,393 (18,096) (2,423)
Other liabilities 4,248 2,887 2,315
-----------------------------------------------------
Net Cash Provided by Operating Activities 216,923 111,061 160,782
----------------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Acquisitions of businesses, net of disposal of business (15,380) (1,231) (64,747)
Investments and licenses (3,248) (2,548) (18,400)
Capital expenditures (66,493) (71,196) (85,121)
Disposals of fixed assets 3,109 5,673 3,672
Short-term investments (10,200) (33,700) 20,700
Benefits protection trust (91) (2,286) (4,241)
----------------------------------------------------
Net Cash Used by Investing Activities (92,303) (105,288) (148,137)
---------------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Notes payable (8,900) 166,737 8,888
Long-term borrowings 15,631 31,836 119,959
Payments on long-term debt (39,576) (51,990) (13,798)
Net proceeds from stock plans 13,150 40,642 9,106
Purchase of treasury stock (29,979) (40,204) (84,998)
Proceeds from the sale of put options 2,049 -- --
Dividends paid (80,574) (78,311) (56,299)
----------------------------------------------------
Net Cash (Used) Provided by Financing Activities (128,199) 68,710 (17,142)
---------------------------------------------------------------------------------------------------------------------------------
Cash Flow for Year (3,579) 74,483 (4,497)
Cash and Cash Equivalents at Beginning of Year 86,677 12,125 17,972
Effect of Exchange Rate Changes on Cash (2,090) 69 (1,350)
---------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $81,008 $86,677 $12,125
=================================================================================================================================
Supplemental disclosures:
Interest paid (net of amount capitalized) $21,844 $18,098 $14,242
Income taxes paid (net of refunds) 26,792 49,989 34,370
=================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
Notes to Consolidated Financial Statements
Pall Corporation and Subsidiaries
(In thousands, except per share data)
Accounting Policies and Related Matters
The Company
The Company manufactures and markets filtration and separation products and
systems throughout the world to a diverse group of customers within four
markets--Medical, BioPharmaceuticals, Aeropower and Fluid Processing.
The Company's fiscal year ends on the Saturday closest to July 31, except that
the Company's foreign subsidiaries are on a July 31 fiscal year. The years ended
July 29, 2000, July 31, 1999 and August 1, 1998 each comprise 52 weeks.
Presentation and Use of Estimates
The financial statements of the Company are presented on a consolidated basis
with its subsidiaries, all of which are wholly owned. All significant
intercompany balances and transactions have been eliminated in consolidation.
Investments (which are less than 20% owned) are considered available-for-sale
securities; as such, these investments are carried at fair value. Unrealized
gains and losses on these securities are reported as a separate component of
stockholders' equity, until realized. Realized gains and losses are recognized
in earnings upon sale.
To prepare the Company's financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that may affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
Translation of Foreign Currencies
Financial statements of foreign subsidiaries have been translated into U.S.
dollars at exchange rates as follows: (i) balance sheet accounts at year-end
rates, and (ii) income statement accounts at weighted average rates. Translation
gains and losses are reflected in stockholders' equity, while transaction gains
and losses are reflected in income. Transaction gains (losses) in fiscal years
2000, 1999 and 1998 amounted to $1,478, $2,893 and $(1,075), respectively.
Cash and Cash Equivalents
All financial instruments purchased with a maturity of three months or less,
other than short-term investments, are considered cash equivalents. Cash
equivalents are held until maturity.
Short-Term Investments
Short-term investments, consisting principally of repurchase agreements secured
by government obligations, are held to maturity and are carried at cost, which
approximates fair value.
Inventories
Inventories are valued at the lower of cost (principally on the first-in,
first-out method) or market.
Long-Lived Assets
Property, plant and equipment are stated at cost. Depreciation of plant and
equipment is provided over the estimated useful lives of the respective assets,
principally on the straight-line basis. Goodwill and costs related to patents
and trademarks are amortized using the straight-line method over the estimated
useful lives, generally for periods ranging up to 20 years.
The Company periodically reviews its long-lived assets for impairment whenever
events or circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected cash flows, undiscounted and without
interest, is less than the carrying amount of the asset, an impairment loss is
recognized as the amount by which the carrying amount of the asset exceeds its
fair value.
Revenue Recognition
Revenue is recognized when a product is shipped or a service is performed.
Stock Plans
Stock plans are accounted for using Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB No.25), and related
interpretations. Under APB No. 25, compensation expense would be recorded if, on
the date of grant, the market price of the underlying stock exceeded its
exercise price. As permitted by SFAS No. 123, Accounting for Stock-Based
Compensation, the Company has retained the accounting prescribed by APB No. 25
and presents the SFAS No.123 information in the footnotes to its consolidated
financial statements.
Income Taxes
The Company and its domestic subsidiaries file a consolidated Federal income tax
return.
Taxes on income are provided using the asset and liability method. Under this
method, deferred tax assets and liabilities are determined based on the
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the years in which the
differences are expected to reverse.
Earnings Per Share
The consolidated statements of earnings present basic and diluted earnings per
share. Basic earnings per share is determined by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Dilutive earnings per share considers the potential effect of
dilution on basic earnings per share assuming potentially dilutive securities,
such as stock options, that meet certain criteria were outstanding since
issuance. Employee stock options of 2,289, 2,957 and 2,343 shares for fiscal
2000, 1999 and 1998, respectively, were not included in the computation of
diluted shares because their effect would have been antidilutive.
29
<PAGE>
The following is a reconciliation between basic shares outstanding and diluted
shares outstanding:
2000 1999 1998
-------------------------------------------------------------------------
Basic shares outstanding 123,810 124,329 125,070
Effect of dilutive securities:
Stock option plans 677 426 611
Other, principally MSPP 222 -- --
-------------------------------------------------------------------------
Diluted shares outstanding 124,709 124,755 125,681
=========================================================================
Acquisitions
On January 31, 2000, the Company purchased a new manufacturing facility,
equipment and certain other assets from Laboratory SpA, a publicly traded
company in Italy, for approximately $15,380, of which $6,600 represents
property, plant and equipment and $8,500 relates to goodwill. Additional
consideration of approximately $3,000 may be paid over the next three years as
certain production levels are achieved. The new facility will be used in the
manufacture of blood product systems.
Effective January 1, 1998, the Company acquired all of the outstanding capital
stock of the Swiss holding company Argentaurum AG, including its Rochem
subsidiaries ("Rochem"). Rochem manufactures and sells proprietary advanced
design reverse osmosis nanofiltration and ultrafiltration systems for treating
and desalinizing sea water, purifying landfill leachate and other municipal and
industrial waste water applications. This acquisition was accounted for under
the purchase method of accounting and, accordingly, the operations of Rochem are
included in the Company's financial statements from the date of acquisition. The
purchase price of approximately $63,000 exceeded the fair market value of the
net assets acquired by approximately $49,000. The Company wrote off $27,000 of
the excess purchase price attributable to in-process research and development
acquired and the remaining amount was allocated to goodwill and patents. The
acquisition of Rochem would not have materially affected the financial
statements of the Company had the results of operations been included in the
Company's financial statements of prior years.
Restructuring and Other Charges
As part of its continued effort to reduce costs, in the fourth quarter of fiscal
2000 the Company implemented a plan to close three U.S. manufacturing facilities
and consolidate certain manufacturing operations as well as to reorganize its
BioPharmaceuticals business. As a result of these actions, the Company recorded
a pretax charge of $11,307 in the fourth quarter.
Cash requirements for these actions are expected to be $4,791, of which $879 has
been expended leaving $3,912 of accruals reflected on the balance sheet as of
July 29, 2000. Of the cash outlays, approximately $3,815 relates to employee
termination benefits and approximately $976 is for incremental costs and
contractual obligations for items such as lease termination payments and other
facility exit costs incurred as a direct result of the planned closures. The
Company expects to terminate approximately 175 employees by the end of fiscal
2001. As of July 29, 2000, approximately 60 employees had been terminated.
The charge also includes $3,421 for inventory write-downs, which have been
classified as a component of cost of sales, related to the rationalization of
product lines. Fixed asset write-offs were approximately $3,095.
Other charges, net represent the write-off of a $2,000 investment in a start-up
company in the fourth quarter of fiscal 2000 and a gain of $1,320 in the first
quarter of fiscal 2000 from the sale of a property in the United Kingdom. After
careful assessment of the current status of certain activities and technologies
of the company, management determined it was appropriate to write off the
investment.
During the third quarter of fiscal 1999, the Company announced and implemented a
plan to restructure its operations with targeted payroll and expense reductions
of over $50 million per annum. The Company initiated the restructuring to bring
operating costs in line with reducing gross margins. The major restructuring
details included:
o consolidation of European inventory warehousing and distribution
functions
o restructuring of Japanese operations
o relocation and consolidation of certain manufacturing operations
o rationalization of the research and development and scientific and
laboratory services functions
o realignment of the Medical division sales forces
o reduction in corporate costs
As a result of the restructuring, the Company's global work force was reduced by
approximately 500 people. Upon consolidation of the European inventory
warehousing and distribution functions and restructuring of the Japanese
operations, the Company identified excess inventory that could not be sold
within the normal product life cycle. Consequently, the Company wrote off
inventory of $13,811. The total cost related to all restructuring related
activities resulted in a charge of $43,912 in the third quarter of fiscal 1999.
Along with the restructuring, the Company performed a comprehensive review of
its business. Across all business lines, the review identified instances where
certain products had been superseded by newer products and some excess inventory
that resulted from competitive conditions and adverse changes in product demand.
As a result, the Company wrote off $6,969 in inventory and provided an
incremental reserve of $3,958 to reflect current market conditions and shorter
product life cycles. The review also identified write-downs of $26,961 on
certain fixed and other assets, principally to provide for the impairment of
certain patents and licenses that are not fully recoverable due to lower than
anticipated market potential; to reflect further impairment of land and building
held for sale; and, to write-off certain redundant fixed assets that are no
longer used.
30
<PAGE>
In addition, the Company increased its reserve for future environmental
remediation costs for the cleanup of contaminated water at its Ann Arbor,
Michigan facility by $6,000 because it was anticipated that future remediation
costs would exceed the estimate originally established.
A summary of the restructuring and other charges included in the third quarter
of fiscal 1999 is presented below.
Other
Restructuring Charges Total
-----------------------------------------------------------------------------
Severance $18,243 $ -- $18,243
Fixed asset write-offs 4,977 14,208 19,185
Other asset write-offs -- 12,753 12,753
Lease termination costs 2,877 -- 2,877
Environmental -- 6,000 6,000
Other 4,004 1,633 5,637
-----------------------------------------------------------------------------
Subtotal 30,101 34,594 64,695
Inventory write-down 13,811 10,927 24,738(a)
-----------------------------------------------------------------------------
Total pretax charges $43,912 $45,521 $89,433
=============================================================================
Cash $25,124 $ 7,633 $32,757
Non-cash 18,788 37,888 56,676
-----------------------------------------------------------------------------
Total $43,912 $45,521 $89,433
=============================================================================
(a) Amount included in cost of sales; about $21,000 in inventory
was scrapped.
The fiscal 1999 consolidated balance sheet reflected approximately $9,500 of
accruals related to restructuring and other charges (excluding environmental
matters). These accruals related primarily to severance, lease and distributor
termination obligations pertaining to the consolidation of European inventory
warehousing and distribution functions. As of July 29, 2000 the restructuring is
substantially completed and no additional cash outlays are expected.
During the third quarter of fiscal 1999, the Company adopted the AICPA's
Statement of Position 98-5, Reporting the Costs of Start-Up Activities,
retroactive to the beginning of the fiscal year. As a result, previously
capitalized start-up costs of approximately $5,767 were expensed and recorded in
cost of sales. The effect of adopting this statement resulted in charges of
$1,567 and $4,200 in the first and second quarters of fiscal 1999, respectively.
Other charges, net in fiscal 1998, included the $27,000 write-off in the third
quarter attributable to in-process research and development the Company acquired
as part of the Rochem acquisition and one-time income of $13,500 in the second
quarter of 1998 from Micron Separations Inc., which was found to have infringed
the Company's Nylon Membrane patent. The one-time income from the patent
litigation settlement is reported net of legal and professional fees related to
the patent litigation; a settlement, including costs, of $2,500 with the
Department of Defense concerning a long standing disagreement over a sale dating
back nearly ten years; and write-offs of $2,200 of inventory and equipment due
to the acquisition of new technology.
Inventories
The major classes of inventory are as follows:
2000 1999
--------------------------------------------------------------------------------
Raw materials and components $ 85,171 $ 77,092
Work-in-process 18,044 25,127
Finished goods 99,744 103,648
--------------------------------------------------------------------------------
Total inventory $202,959 $205,867
================================================================================
Other Assets
Other assets consist of the following:
2000 1999
--------------------------------------------------------------------------------
Goodwill and other intangibles, net of
accumulated amortization of
$21,123 and $16,968, respectively $ 57,441 $ 54,731
Patents and trademarks, net of
accumulated amortization of
$18,695 and $15,782, respectively 37,482 38,143
Investments 27,998 25,294
Benefits protection trust 26,710 28,726
Prepaid pension expenses 26,672 24,716
Intangible pension assets 6,064 5,192
Deferred income taxes 39,372 35,020
Other 28,582 25,300
--------------------------------------------------------------------------------
Total $250,321 $237,122
================================================================================
Goodwill and other intangibles represent the cost in excess of the tangible net
assets of businesses acquired.
Patents and trademarks include costs related to successfully defending certain
Pall patents, and expenditures made to register new patents and trademarks, as
well as paid-up licenses for third-party patents.
Investments represent amounts the Company has invested in certain companies to
form strategic alliances which will enable the Company to broaden its portfolio
of products. In fiscal 1998, the Company entered into agreements with V.I.
Technologies, Inc. ("VITEX"), a leading developer of a broad portfolio of blood
products and systems using its proprietary viral inactivation technologies.
Under the terms of the agreements, the Company made payments aggregating $9,000
for a 7.5% interest in VITEX common shares and the companies agreed to share the
costs to jointly develop VITEX' pathogen inactivation technology for red blood
cells and platelets. The Company gets exclusive worldwide marketing and
distribution rights to pathogen inactivation systems developed under this
agreement. As of July 29, 2000, the Company's investments in VITEX amount to
$12,000, representing a 7.3% interest in VITEX common shares. The agreements
contemplate that the Company will make milestone-driven equity payments to VITEX
of up to another $14,000 over the next three years at the then-current market
price of VITEX common shares. The Company completed the sale of its Well
Technology Division to Oiltools International Limited ("Oiltools") during the
third quarter
31
<PAGE>
of fiscal 1999. Coincident with this transaction, Oiltools was recapitalized.
The recapitalization resulted in a loss of control and, as such, the Company no
longer accounts for its investment in Oiltools under the equity method. The
sales transaction was not material to the Company's consolidated financial
statements.
The benefits protection trust was established for the purpose of satisfying
certain previously unfunded pension obligations, in the event of a change of
control of the Company. The July 29, 2000 and July 31, 1999 consolidated balance
sheets reflect related liabilities in the amounts of $31,317 and $31,329,
respectively. The trust primarily holds investments in U.S. government
obligations, debt obligations of corporations and financial institutions with
high credit ratings andequity mutual fund shares. The Company considers
investments held in the trust to be available-for-sale securities. Contractual
maturity dates range from 2000-2028.
Pertinent information related to the trust for fiscal years 2000, 1999 and 1998
follows:
2000 1999 1998
-------------------------------------------------------------------------------
Annual contributions $ 91 $ 2,286 $ 4,241
Total purchases 13,974 16,836 49,477
Total proceeds from sales 13,089 21,603 53,438
Net (losses) gains recognized (222) 228 (29)
===============================================================================
Prepaid pension expenses represent the non-current amounts arising from the
excess of cumulative employer contributions, and earnings thereon, over accrued
net pension expenses.
Intangible pension assets represent the excess of unfunded accumulated benefits
over unrecognized prior service costs. The July 29, 2000 and July 31, 1999
consolidated balance sheets reflect additional long-term pension liabilities of
$8,034 and $8,172, respectively and a reduction in stockholders' equity, net of
deferred tax benefits, of $1,271 and $1,937, respectively.
Notes Payable and Long-Term Debt
At July 29, 2000, the Company had lines of credit totaling approximately
$491,000, of which $282,743 in notes payable had been drawn. Such lines of
credit do not represent legal commitments on the parts of the financial
institutions and no compensating balances are required. The weighted average
interest rates at the end of fiscal 2000 and 1999 were 6.5% and 5.1%,
respectively.
On August 29, 2000, the Company completed a $100,000 private placement of 7.83%
unsecured senior notes due in 2010. In addition, on August 30, 2000, the Company
closed a $200,000 unsecured senior revolving credit facility, of which $150,000
expires in 2005 and $50,000 renews annually. Borrowings under this facility bear
interest at a floating rate based upon LIBOR. The agreements contain various
covenants, including financial covenants pertaining to interest coverage, funded
debt and minimum net worth. As a result of these transactions, lines of credit
amounting to $230,000 included in the $491,000 total credit lines described in
the preceding paragraph were canceled and the immediate credit availability of
the Company increased $70,000. Additionally, approximately $170,200 of U.S.
dollar denominated notes payable included in the $282,743 total notes payable
outstanding at July 29, 2000 have been classified as long-term debt in the
consolidated balance sheet.
Long-term debt consists of:
2000 1999
--------------------------------------------------------------------------------
Notes payable $170,200 $ --
1.00%-2.60% bank loans in Japan,
due through 2004 78,791 78,379
6.31% bank loan, due through 2002 18,000 26,000
5.99% bank loan, due through 2003 27,500 37,500
5.89% industrial development bonds due
on July 1, 2004 4,415 4,415
7.38% sale-and-leaseback obligation,
due through 2001 3,378 6,525
Other 1,633 1,502
--------------------------------------------------------------------------------
Total long-term debt 303,917 154,321
Less: current portion 80,002 37,506
--------------------------------------------------------------------------------
Long-term debt, net of current portion $223,915 $116,815
================================================================================
The aggregate annual maturities of long-term debt during the fiscal years 2001
through 2005 are approximately as follows: 2001, $80,002; 2002, $34,057; 2003,
$11,245; 2004, $8,323; and 2005, $90.
Interest expense for 2000, 1999 and 1998 amounted to $22,230, $18,416 and
$13,329, respectively. Interest income for 2000, 1999 and 1998 amounted to
$8,153, $5,401 and $5,459, respectively.
Income Taxes
The components of earnings before income taxes are as follows:
2000 1999 1998
--------------------------------------------------------------------------------
Domestic operations, including
Puerto Rico $ 84,838 $ (7,716) $ 51,899
Foreign operations 103,566 66,620 83,086
--------------------------------------------------------------------------------
Total $188,404 $ 58,904 $134,985
================================================================================
The provisions for income taxes consist of the following items:
2000 1999 1998
--------------------------------------------------------------------------------
Current:
Federal and Puerto Rico $ 7,352 $ 3,450 $ 34,156
State 500 900 1,500
Foreign 31,218 19,181 25,628
--------------------------------------------------------------------------------
Total 39,070 23,531 61,284
--------------------------------------------------------------------------------
Deferred:
Federal and Puerto Rico 960 (14,873) (19,662)
Foreign 1,738 (1,261) (270)
--------------------------------------------------------------------------------
Total 2,698 (16,134) (19,932)
--------------------------------------------------------------------------------
Total income tax expense $ 41,768 $ 7,397 $ 41,352
================================================================================
32
<PAGE>
A reconciliation of the provisions for income taxes follows:
% of Pretax Earnings
----------------------------------------------------------------------------
2000 1999 1998
----------------------------------------------------------------------------
Computed "expected" tax expense 35.0% 35.0% 35.0%
Tax benefit of Puerto Rico
operations (11.3) (33.7) (10.3)
Federal tax credits and other effects (0.3) (0.8) --
Change in valuation allowance 1.0 -- (0.8)
In-process research and
development write-off -- -- 7.0
Foreign income and withholding
taxes, net of U.S. foreign
tax credits (2.4) 11.1 (1.0)
State income taxes, net of Federal
income tax benefit 0.2 1.0 0.7
----------------------------------------------------------------------------
Total and effective tax rate 22.2% 12.6% 30.6%
============================================================================
The Company has two Puerto Rico subsidiaries that are organized as "possessions
corporations" as defined in Section 936 of the Internal Revenue Code. The Small
Business Job Protection Act of 1996 repealed Section 936 of the Internal Revenue
Code which provided a tax credit for U.S. companies with operations in certain
U.S. possessions, including Puerto Rico. For companies with existing qualifying
Puerto Rico operations, such as Pall, Section 936 will be phased out over a
period of several years, with a decreasing credit being available through the
last taxable year beginning before January 1, 2006.
The Company also operates a third Puerto Rico entity as a branch of a wholly
owned controlled foreign corporation ("CFC"). Under U.S. tax principles, the
earnings of a CFC are normally subject to U.S. tax only upon repatriation.
Accordingly, no taxes have been provided on the unrepatriated earnings of this
subsidiary.
The tax effects of temporary differences and loss carry-forwards that give rise
to significant portions of the net deferred tax asset at July 29, 2000 and July
31, 1999 are as follows:
2000 1999
-------------------------------------------------------------------------------
Deferred tax asset:
Tax loss and tax credit carry-forwards $ 36,112 $ 43,765
Inventories 12,337 11,332
Pension liabilities 17,115 17,682
Accrued expenses 14,952 12,215
Other 7,037 6,184
-------------------------------------------------------------------------------
Gross deferred tax asset 87,553 91,178
Valuation allowance (3,252) (1,450)
-------------------------------------------------------------------------------
Total deferred tax asset 84,301 89,728
-------------------------------------------------------------------------------
Deferred tax liability:
Plant and equipment (32,043) (34,471)
Pension assets (6,868) (6,264)
Other (876) (1,793)
-------------------------------------------------------------------------------
Total deferred tax liability (39,787) (42,528)
-------------------------------------------------------------------------------
Net deferred tax asset $ 44,514 $ 47,200
===============================================================================
The valuation allowance has been increased by $1,802 as of July 29, 2000 to
reflect certain foreign tax credit carry-forwards generated in fiscal 2000,
which may not be utilized. In evaluating the reasonableness of the valuation
allowance, management assesses whether it is more likely than not that some
portion, or all, of the deferred tax assets will not be realized. Ultimately,
the realization of deferred tax assets is dependent upon generation of future
taxable income during those periods in which temporary differences become
deductible and/or credits can be utilized. To this end, management considers the
level of historical taxable income, the scheduled reversal of deferred tax
liabilities, tax-planning strategies and projected future taxable income. Based
on these considerations, and the indefinite carry-forward availability of
certain deferred tax credits (principally related to alternative minimum tax),
management believes it is more likely than not that the Company will realize the
benefit of these items, net of the July 29, 2000 valuation allowance.
United States income taxes have not been provided on the retained earnings of
foreign subsidiaries (including the Puerto Rico CFC referred to above), which
totaled $203,000, at July 29, 2000 ($149,000 at July 31, 1999). Foreign
subsidiaries have paid, and are expected to continue to pay, dividends out of
accumulated earnings. A portion of such earnings will however be permanently
reinvested and any additional U.S. taxes arising from the repatriation of
earnings available for distribution, less applicable credits for taxes paid
abroad, would not be material.
Other Non-Current Liabilities
This consists primarily of accruals for deferred compensation plans and
arrangements, the benefits of which are, and will continue to be, paid to
covered officers and employees. Also included are accruals for environmental
remediation costs.
Common Stock
Shareholder Rights Plan
In 1989, the Board of Directors adopted a Shareholder Rights Plan. Under the
Plan, as amended April 20, 1999, one right is attached to each outstanding share
of the Company's common stock. Each right, when it becomes exercisable, will
entitle the registered holder to purchase one share of the Company's common
stock at an initial exercise price of $80 per share, subject to adjustment in
certain events. The rights will become exercisable and will trade separately
from the common stock (1) ten days after any person or group acquires 20% or
more of the Company's outstanding common stock (an Acquiring Person), or (2) ten
business days after any person or group commences or announces a tender offer
for 20% or more of the outstanding common stock. If any person or group becomes
an Acquiring Person, each holder of a right, other than rights owned by the
Acquiring Person, would thereafter be entitled, upon exercise of the right at
the exercise price, to receive a number of shares of common stock of the Company
having a market value at that time of twice the exercise price of the right.
Alternatively, the Board of Directors could exchange the rights not owned by the
Acquiring Person for common stock at an exchange ratio of one share of common
stock per right. In addition, if the Company is acquired in a
33
<PAGE>
merger or other business combination, or 50% or more of its consolidated assets
or earning power are sold, each holder of a right would thereafter be entitled,
upon exercise of the right at the exercise price, to receive a number of shares
of the most powerful voting capital stock of the acquiring company which at the
time of the business combination or sale had a market value of twice the
exercise price of the right.
The rights will expire on December 1, 2009, unless earlier redeemed. The rights
are redeemable by the Board of Directors for one-third of a cent per right at
any time until a person or group becomes an Acquiring Person.
Stock Repurchase Programs
On October 6, 1997, the Company's Board of Directors authorized the expenditure
of up to $150,000 to repurchase shares of the Company's common stock. On January
20, 2000, the Board of Directors extended the stock buy-back program by three
years with an authorization to expend up to an additional $200,000. The Company
completed the $150,000 stock buy-back program in the current fiscal year. In
fiscal years 2000, 1999 and 1998 the Company bought 1,446, 1,796 and 3,928
shares at an aggregate cost of $29,979, $40,204 and $84,998, respectively. At
July 29, 2000, $194,819 remains to be expended under the Board's most recent
authorization.
In connection with the Company's stock repurchase program, approximately 1,360
put options with strike prices ranging from $21.40 to $22.75 were sold under
three separate contracts with an independent third party during fiscal 2000. The
contracts grant the purchaser the right to sell shares of Pall Corporation stock
to the Company at specified future dates and prices. In the event the puts are
exercised, the contracts allow the Company to determine whether to settle in
cash or shares. As such, the contracts are considered equity instruments and
changes in fair value are not recognized in the Company's financial statements.
The premiums received of $2,049 were recorded as additions to capital in excess
of par value. Contracts related to approximately 920 put options expired in
fiscal 2000 unexercised. At July 29, 2000, one contract for approximately 440
put options, with a strike price of $22.75 and expiration date of September 25,
2000, is outstanding.
Repurchased shares are held in treasury for use in connection with the Company's
stock plans and for general corporate purposes. At July 29, 2000, the Company
held 4,840 treasury shares.
Stock Plans
Stock Purchase Plans
During fiscal 2000, the Company implemented two stock purchase plans, a
Management Stock Purchase Plan ("MSPP") and an Employee Stock Purchase Plan
("ESPP"). These plans enable employees of the Company to purchase Company stock.
Participation in the MSPP is limited to certain executives as designated by the
Compensation Committee of the Board of Directors, which also established common
stock ownership targets for participants. Participation in the ESPP is available
to all employees except those that are included in the MSPP. The Company's
shareholders approved both plans at the Company's annual meeting in November
1999.
The purpose of the MSPP plan is to encourage key employees of the Company to
increase their ownership of shares of the Company's common stock by providing
such employees with an opportunity to elect to have portions of their total
annual compensation paid in the form of restricted units, to make cash purchases
of restricted units and to earn additional matching restricted units. Such
restricted units aggregated 259 as of July 29, 2000. Vesting occurs over a
three-year period. During fiscal 2000, participants' deferred compensation and
cash payments amounted to $3,741 and the Company recognized $1,206 of expense
related to matching restricted units.
The ESPP plan enables participants to purchase shares of the Company's common
stock through payroll deductions at a price equal to 85% of the lower of the
market price at the beginning or end of each semi-annual stock purchase period.
The Company issued 96 shares, all of which were treasury shares, at the end of
the first offering period ended April 28, 2000 at an average price per share of
$18.43.
34
<PAGE>
Stock Option Plans
The Company has adopted several plans that provide for the granting of stock
options to officers, employees and non-employee directors, at option prices
equal to the market price of the common stock at date of grant. The forms of
option adopted provide that the options may not be exercised within one year
from the date of grant, and expire if not completely exercised within five years
from the date of grant. For the most part, in any year after the first year, the
options can be exercised with respect to only up to 25% of the shares subject to
the option, computed cumulatively.
2000 1999
--------------------------------------------------------------------------
Options exercisable 4,091 2,395
Options available for grant 1,586 1,454
--------------------------------------------------------------------------
Changes in the options outstanding during fiscal years 1998, 1999 and 2000 are
summarized in the following table:
Weighted
Number of Price Average
Options Range Price
-----------------------------------------------------------------------------
Balance--August 2, 1997 5,244 $ 2.60-27.25 $ 20.58
Fiscal 1998:
Options granted 3,081 19.88-21.28 20.40
Options exercised (488) 2.60-21.33 15.36
Options terminated (198) 10.63-24.25 21.94
-----------------------------------------------------------------------------
Balance--August 1, 1998 7,639 2.60-27.25 20.81
Fiscal 1999:
Options granted 3,313 17.38-25.66 17.81
Options exercised (2,211) 2.64-24.25 18.22
Options terminated (432) 5.45-26.44 20.98
-----------------------------------------------------------------------------
Balance--July 31, 1999 8,309 2.60-27.25 20.29
Fiscal 2000:
Options granted 148 17.84-23.50 22.38
Options exercised (224) 2.64-21.50 18.90
Options terminated (309) 2.81-24.25 19.87
-----------------------------------------------------------------------------
Balance--July 29, 2000 7,924 $ 2.60-27.25 $ 20.39
=============================================================================
As of July 29, 2000, 9,510 shares of common stock of the Company were reserved
for the exercise of stock options. To the extent treasury shares are used to
satisfy option exercises, these reserved shares will not be issued.
Pro Forma Disclosures
Using the Black-Scholes option-pricing model, the disclosures
required under SFAS No. 123 are as follows:
2000 1999 1998
--------------------------------------------------------------------------
Average fair value of options
granted $ 7.00 $ 5.20 $ 4.90
Valuation assumptions:
Expected dividend yield 3.2% 3.0% 3.0%
Expected volatility 35.0% 35.0% 25.0%
Expected life (years) 5 5 5
Risk-free interest rate 6.6% 5.6% 5.9%
--------------------------------------------------------------------------
Pro forma effect
Reduction in net earnings $ 9,017 $ 5,700 $ 2,721
Reduction in earnings per
share, basic and diluted $ 0.07 $ 0.05 $ 0.02
==========================================================================
Incentive Compensation Plan
The plan provides additional compensation to officers and key employees of the
Company and its subsidiaries based upon the achievement of specified management
goals. The Compensation Committee of the Board of Directors establishes the
goals on which the Company's executive officers are compensated, and management
establishes the goals for other covered employees. The aggregate amounts charged
to expense in connection with the plan were $11,900, $8,900 and $7,200 for
fiscal years 2000, 1999 and 1998, respectively.
Pension and Profit Sharing Plans
and Arrangements
Pension Plans
The Company and its subsidiaries provide substantially all domestic and foreign
employees with pension benefits. The Company's pension plans provide benefits
based on salary and service. Funding policy for domestic plans is in accordance
with Employee Retirement Income Security Act of 1974 ("ERISA") funding
standards; for foreign plans, funding is determined by local tax laws and
regulations. Plan assets are invested primarily in common stocks, bonds and cash
instruments. Pension costs charged to operations totaled $10,675, $14,162 and
$12,414 in fiscal years 2000, 1999 and 1998, respectively.
35
<PAGE>
The following table reflects the change in benefit obligations and change in
plan assets for the Company's defined benefit pension plans:
<TABLE>
<CAPTION>
U.S. Plans Foreign Plans
---------------------------------------------------------------------------------------------------------
2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in Benefit Obligation
Benefit obligation--beginning of year $ 109,110 $ 106,232 $ 106,521 $ 86,134
Service cost 4,551 5,974 6,172 6,114
Interest cost 7,755 7,244 5,958 6,160
Plan participant contributions -- -- 1,617 1,740
Plan amendments 723 3,222 1,334 --
Actuarial (gain) loss (2,761) (7,212) (3,145) 7,968
Total benefits paid (9,325) (6,350) (4,279) (4,014)
Effect of exchange rates -- -- (6,874) 2,419
---------------------------------------------------------------------------------------------------------
Benefit obligation end of year 110,053 109,110 107,304 106,521
---------------------------------------------------------------------------------------------------------
Change in Plan Assets
Fair value of plan assets--beginning of year 76,624 69,109 129,919 116,448
Actual return on plan assets 4,813 10,374 11,176 9,991
Company contributions 4,176 3,491 5,216 4,529
Plan participant contributions -- -- 1,617 1,740
Benefits paid from plan assets (9,325) (6,350) (4,279) (4,014)
Effect of exchange rates -- -- (8,878) 1,225
---------------------------------------------------------------------------------------------------------
Fair value of plan assets--end of year 76,288 76,624 134,771 129,919
---------------------------------------------------------------------------------------------------------
Funded Status (33,765) (32,486) 27,467 23,398
Unrecognized actuarial gain (10,996) (10,601) (17,189) (13,428)
Unrecognized prior service cost 7,372 7,986 262 341
Unrecognized transition (asset) or obligation (1,135) (1,401) 166 (1,624)
---------------------------------------------------------------------------------------------------------
Net amount recognized (38,524) (36,502) 10,706 8,687
---------------------------------------------------------------------------------------------------------
Amount recognized in the balance sheet consists of:
Prepaid benefit -- -- 26,672 24,716
Accrued benefit liability (45,498) (44,674) (17,026) (16,029)
Intangible asset 5,197 5,192 867 --
Accumulated other comprehensive income 1,777 2,980 193 --
---------------------------------------------------------------------------------------------------------
Net amount recognized $ (38,524) $ (36,502) $ 10,706 $ 8,687
=========================================================================================================
Plans with accumulated benefit obligations in excess of
plan assets consist of the following:
Accumulated benefit obligation $ 31,278 $ 31,300 $ 11,028 $ 10,312
Projected benefit obligation 37,924 38,711 9,330 12,010
Plan assets at fair value -- -- -- --
=========================================================================================================
</TABLE>
Net periodic benefit cost for the Company's defined benefit pension plans
includes the following components:
<TABLE>
<CAPTION>
U.S. Plans Foreign Plans
------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $4,551 $5,974 $4,365 $6,172 $6,114 $5,307
Interest cost 7,755 7,244 6,720 5,958 6,160 5,136
Expected return on plan assets (6,871) (6,023) (5,101) (8,573) (8,449) (7,163)
Amortization of prior service cost 813 789 652 141 39 39
Amortization of net transition asset (266) (166) (166) (537) (551) (554)
Recognized actuarial loss (gain) 213 1,417 1,254 (15) 16 (235)
------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $6,195 $9,235 $7,724 $3,146 $3,329 $2,530
==============================================================================================================================
</TABLE>
36
<PAGE>
The following table provides the weighted average assumptions used to determine
plan liabilities and expense:
<TABLE>
<CAPTION>
U.S. Plans Foreign Plans
------------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted average discount rate 7.75% 7.50% 7.00% 2.50 - 6.50% 2.50 - 6.50% 2.50 - 7.50%
Expected long-term rate of return on plan assets 10.00% 10.00% 10.00% 4.50 - 7.00% 4.50 - 7.00% 4.50 - 7.75%
Rate of compensation increase 4.75% 4.75% 4.75% 3.00% 2.50 - 3.00% 2.30 - 4.50%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company and its subsidiaries also participate in certain pension plans
primarily for the benefit of its employees who are union members. Contributions
to these plans were $1,334, $1,598 and $2,160 for fiscal years 2000, 1999 and
1998, respectively.
Profit Sharing Plan
The Company's profit sharing and 401(k) plan covers substantially all domestic
employees of the Company and its participating subsidiaries, other than those
employees covered by a union retirement plan. The plan provides that, unless the
Board of Directors decides otherwise, the Company contribute annually the lesser
of (a) the amount which, when added to forfeitures for the year, equals 7.5% of
the amount by which the consolidated net operating income before income taxes of
the Company and its participating subsidiaries exceeds $500, or (b) the amount
deductible for Federal income tax purposes. The expense associated with the plan
for fiscal years 2000, 1999 and 1998 was $7,605, $3,408 and $4,581,respectively.
Other Comprehensive Income
During fiscal year 1999, the Company adopted SFAS No. 130, Reporting
Comprehensive Income, and has elected to report Comprehensive Income in the
Consolidated Statement of Stockholders' Equity. The statement requires
disclosures of the amount of income tax expense or benefit allocated to each
component of other comprehensive income. The changes in the components of other
comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---------------------------------------------------------------------------------------------------------------------------------
Pretax Tax Net Pretax Tax Net Pretax Tax Net
Amount Effect Amount Amount Effect Amount Amount Effect Amount
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unrealized translation adjustment $(20,835) $ (366) $(21,201) $ (1,966) $ 232 $(1,734) $(5,545) $ (149) $(5,694)
Minimum pension liability adjustment 1,010 (344) 666 3,269 (1,144) 2,125 439 (153) 286
Unrealized investment gains (losses) 499 (175) 324 (12,780) 4,473 (8,307) 6,065 (2,115) 3,950
---------------------------------------------------------------------------------------------------------------------------------
$(19,326) $ (885) $(20,211) $(11,477) $ 3,561 $(7,916) $ 959 $(2,417) $(1,458)
=================================================================================================================================
</TABLE>
Contingencies and Commitments
Certain facilities of the Company are involved in environmental proceedings. The
reserve established for the most significant matter pertains to the Company's
subsidiary, Gelman Sciences Inc. ("Gelman"), and constitutes most of the nearly
$14,600 of accruals related to environmental matters reflected in the Company's
balance sheet at July 29, 2000. Nearly ten years prior to Gelman's acquisition
by the Company in February 1997, an action was filed in Circuit Court for
Washtenaw County, Michigan ("Court") by the State of Michigan ("State") seeking
to compel Gelman to investigate and remediate the contamination near Gelman's
Ann Arbor facility, which allegedly was caused by Gelman's disposal of waste
water from its manufacturing process under legal and accepted discharge
practices in the 1970s. Pursuant to a consent decree entered into by Gelman and
the State in 1992 (amended September 1996 and October 1999), which resolved that
litigation, Gelman is remediating the contamination without admitting
wrongdoing. In February 2000, the State Assistant Attorney General filed a
Motion to Enforce Consent Judgement in the Court seeking approximately $4,900 in
stipulated penalties for the alleged violations of the Consent Judgement and
additional injunctive relief. Gelman vigorously disputed these assertions and in
July 2000, the Court took the matter of penalties "under advisement" and clearly
stated its intent to assure completion of the cleanup program already under way.
Also during the fourth quarter of 2000, the Company received funds aggregating
approximately $5,000 from its insurance carrier as final settlement of its
insurance obligations for the Gelman remediation. These funds were added to the
reserve, principally to cover revised estimates for the future costs of
remediation and ongoing legal expenses. In the opinion of management, the
Company is in substantial compliance with applicable environmental laws and its
current accruals for environmental remediation are adequate. Because regulatory
standards under environmental laws are becoming increasingly stringent, there
can be no assurance that future developments will not cause the Company to incur
material environmental liabilities or costs beyond those accrued in its
consolidated financial statements.
37
<PAGE>
The Company and its subsidiaries are subject to certain other legal actions that
arise in the normal course of business. It is management's opinion that these
other actions will not have a material effect on the Company's consolidated
financial position.
The Company and its subsidiaries lease office and warehouse space, automobiles,
computers and office equipment. Rent expense for all operating leases amounted
to approximately $17,800 in 2000, $18,900 in 1999 and $17,300 in 1998. Future
minimum rental commitments at July 29, 2000 for all noncancelable operating
leases with initial terms exceeding one year are $11,300 in 2001; $7,400 in
2002; $5,200 in 2003; $3,100 in 2004; $1,300 in 2005 and $800 thereafter.
The Company has employment agreements with its executive officers, the terms of
which expire at various times through January 2003. Such agreements, which have
been revised from time to time,provide for minimum salary levels, adjusted
annually for cost-of-living changes, as well as for incentive bonuses that are
payable if specified management goals are attained. The aggregate commitment for
future salaries at July 29, 2000, excluding bonuses, was approximately $10,140.
Financial Instruments and Risks and Uncertainties
The Company considers the fair value of all financial instruments to be not
materially different from their carrying value at year-end.
The Company's cash and cash equivalents and investments are in high-quality
securities placed with a wide array of financial institutions with high credit
ratings. This investment policy limits the Company's exposure to concentration
of credit risks.
The Company's products are sold to a diverse group of customers throughout the
world. As such, the Company is subject to certain risks and uncertainties as a
result of changes in general economic conditions, sources of supply,
competition, foreign exchange rates, tax reform, litigation and regulatory
developments. The diversity and breadth of the Company's products and geographic
operations mitigate the risk that adverse changes in any event would materially
affect the Company's financial position. Additionally, as a result of the
diversity of its customer base, the Company does not consider itself exposed to
concentration of credit risks. These risks are further minimized by placing
credit limits, ongoing monitoring of customers' account balances, and assessment
of customers' financial strength.
The Company enters into forward exchange contracts, generally with terms of 90
days or less, to manage its foreign currency transaction exposures. Effects of
changes in currency rates on those transactions are therefore minimized and
hedges are accounted foras part of the underlying transactions. The total value
of open contracts at year-end was not material.
Quarterly Financial Information
Unaudited quarterly financial information appears on page 41.
Market and Geographic Segment Information
In fiscal 1999, the Company adopted SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information (SFAS No. 131). SFAS No. 131 supersedes
previously issued segment reporting disclosure rules and requires the reporting
of certain information about the Company's operating segments (markets) on a
basis consistent with the way in which the Company is managed and operated. The
segment disclosures for fiscal 1998 have been restated to the extent practical.
The Company manufactures and markets filtration and separation products and
systems throughout the world in four principal markets--Medical,
BioPharmaceuticals, Aeropower and Fluid Processing, each managed by a worldwide
business leader. The Company's underlying accounting records are maintained on a
legal entity basis for statutory and public reporting purposes. Most of the
legal entities operate in more than one market. For internal reporting purposes,
the Company has historically categorized sales in submarkets within its four
principal markets; however, the Company does not categorize other SFAS No. 131
disclosures by sub-markets within its four principal markets. Nor does the
Company manage and categorize all assets within its Health Care market between
its Medical and BioPharmaceuticals markets. Certain assets managed at the
corporate level, including property and equipment, intangible assets and
investments, are not allocated to the identifiable markets. Accordingly,
operating profits for markets exclude general corporate expenses. The Company
also does not use restructuring and other charges to measure and evaluate
operating profitability by markets.
38
<PAGE>
Market Segment Information
2000 1999 1998
-------------------------------------------------------------------------------
Sales to Unaffiliated Customers:
Blood $ 211,088 $ 186,266 $ 177,310
Critical Care 87,291 86,647 82,814
-----------------------------------------
Medical 298,379 272,913 260,124
-----------------------------------------
BioPharmaceuticals 237,209 238,313 210,077
Food and Beverage 59,723 54,846 49,073
Specialty Materials 35,680 39,570 35,052
-----------------------------------------
BioPharmaceuticals 332,612 332,729 294,202
-----------------------------------------
Health Care 630,991 605,642 554,326
---------------------- ------------------
Aerospace 134,106 135,543 124,449
Industrial Hydraulics 136,841 131,415 134,041
-----------------------------------------
Aeropower 270,947 266,958 258,490
-----------------------------------------
Microelectronics 103,673 62,540 87,608
Industrial Process 218,490 211,926 186,861
-----------------------------------------
Fluid Processing 322,163 274,466 274,469
-----------------------------------------
Total $ 1,224,101 $ 1,147,066 $ 1,087,285
===============================================================================
Operating Profit:
Medical $ 83,953 $ 72,459 $ 68,986
BioPharmaceuticals 76,314 57,602 45,132
-----------------------------------------
Health Care 160,267 130,061 114,118
Aeropower 67,913 64,040 60,982
Fluid Processing 46,695 32,004 46,531
-----------------------------------------
Subtotal 274,875 226,105 221,631
Restructuring and other charges, net (11,987) (89,433) (19,222)
General corporate expenses (60,407) (64,753) (59,554)
Interest expense, net (14,077) (13,015) (7,870)
-----------------------------------------
Earnings before income taxes $ 188,404 $ 58,904 $ 134,985
===============================================================================
Depreciation and Amortization:
Health Care $ 30,299 $ 27,804 $ 28,791
Aeropower 12,472 10,937 10,809
Fluid Processing 15,223 20,743 19,900
-----------------------------------------
Subtotal $ 57,994 59,484 59,500
Corporate 13,967 15,287 13,579
-----------------------------------------
Total $ 71,961 $ 74,771 $ 73,079
===============================================================================
Identifiable Assets:
Health Care $ 610,654 $ 571,979 $ 542,947
Aeropower 224,038 219,502 210,760
Fluid Processing 293,985 306,661 292,403
-----------------------------------------
Subtotal 1,128,677 1,098,142 1,046,110
Corporate 378,575 390,185 317,102
-----------------------------------------
Total $ 1,507,252 $ 1,488,327 $ 1,363,212
===============================================================================
Capital Expenditures:
Health Care $ 39,983 $ 38,473 $ 43,234
Aeropower 11,246 8,335 9,414
Fluid Processing 13,191 20,972 25,271
-----------------------------------------
Subtotal 64,420 67,780 77,919
Corporate 2,073 3,416 7,202
-----------------------------------------
Total $ 66,493 $ 71,196 $ 85,121
===============================================================================
39
<PAGE>
Geographic Segment Information
2000 1999 1998
-------------------------------------------------------------------------------
Sales to Unaffiliated Customers:
Western Hemisphere $ 568,025 $ 509,191 $ 515,295
Europe 435,318 455,088 397,880
Asia 220,758 182,787 174,110
-----------------------------------------
Total $ 1,224,101 $ 1,147,066 $ 1,087,285
===============================================================================
Operating Profit:
Western Hemisphere $ 153,190 $ 102,351 $ 115,317
Europe 91,964 106,924 91,670
Asia 36,000 18,289 14,974
Eliminations (6,279) (1,459) (330)
-----------------------------------------
Subtotal 274,875 226,105 221,631
Restructuring and other charges, net (11,987) (89,433) (19,222)
General corporate expenses (60,407) (64,753) (59,554)
Interest expense, net (14,077) (13,015) (7,870)
-----------------------------------------
Earnings before income taxes $ 188,404 $ 58,904 $ 134,985
===============================================================================
Identifiable Assets:
Western Hemisphere $ 571,988 $ 554,450 $ 550,091
Europe 390,946 394,095 374,810
Asia 183,740 163,247 133,622
Eliminations (17,997) (13,650) (12,413)
-----------------------------------------
Subtotal 1,128,677 1,098,142 1,046,110
Corporate 378,575 390,185 317,102
-----------------------------------------
Total $ 1,507,252 $ 1,488,327 $ 1,363,212
===============================================================================
Export sales to unaffiliated customers by the Company's U.S. operations
approximately totaled $74,000, $63,000 and $74,000 in fiscal years 2000, 1999
and 1998, respectively. The Company considers its foreign operations to be of
major importance to its future growth prospects, and does not believe the risk
of its foreign business differs materially from its domestic business, except
for the risk of currency fluctuations.
Transfers between geographic areas are generally priced on the basis of a markup
of manufacturing costs to achieve an appropriate sharing of the profit between
the parties.
40
<PAGE>
Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000(a):
Net sales $ 267,122 $ 294,699 $ 318,049 $ 344,231 $1,224,101
Gross profit 142,376 158,016 174,481 191,508 666,381
Earnings before income taxes 32,335 43,933 54,274 57,862 188,404
Net earnings 24,898 33,828 41,792 46,118 146,636
Earnings per share:
Basic 0.20 0.27 0.34 0.37 1.18
Diluted 0.20 0.27 0.34 0.37 1.18
1999(b):
Net sales $ 249,850 $ 278,255 $ 299,896 $ 319,065 $1,147,066
Gross profit 132,510 144,491 140,367 181,692 599,060
Earnings before income taxes 17,740 20,738 (44,902) 65,328 58,904
Net earnings 13,461 15,974 (28,323) 50,395 51,507
Earnings per share:
Basic 0.11 0.13 (0.23) 0.40 0.41
Diluted 0.11 0.13 (0.23) 0.40 0.41
</TABLE>
-------------------------------------------------------------------------
(a) In the first quarter, the Company recorded a $1,320 gain on the sale of
a facility in the U.K., increasing first quarter basic and diluted
earnings per share by 1 cent after pro forma tax effect. During the
fourth quarter, the Company recorded $13,307 in restructuring and other
charges (including $3,421 reflected in cost of sales), decreasing
fourth quarter basic and diluted earnings per share by 7 cents after
pro forma tax effect.
(b) During the third quarter, the Company recorded $89,433 in restructuring
and other charges (including $24,738 reflected in cost of sales),
decreasing third quarter and full-year basic and diluted earnings per
share by 51 cents after pro forma tax effect.
Common Stock Prices and Cash Dividends
Pall Corporation's Common Stock is listed on the New York and London Stock
Exchanges. The table below sets forth quarterly data relating to the Company's
Common Stock prices and cash dividends declared per share for the past two
fiscal years.
<TABLE>
<CAPTION>
Cash dividends
2000 1999 declared per share
--------------------------------------------------------------------------------------------
Price per share High Low High Low 2000 1999
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Quarter: First $ 25.19 $ 18.38 $ 25.75 $ 19.56 $ 0.1600 $ 0.1550
Second 24.94 18.44 26.63 21.63 0.1650 0.1600
Third 25.00 17.13 23.25 15.75 0.1650 0.1600
Fourth 24.25 18.31 22.81 17.25 0.1650 0.1600
============================================================================================
</TABLE>
There are approximately 6,100 holders of record of the Company's Common Stock.
<TABLE>
<CAPTION>
Six-Year Sales
(In thousands) 2000 1999 1998 1997 1996 1995
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Health Care $ 630,991 $ 605,642 $ 554,326 $ 555,378 $ 570,835 $489,347
Aeropower 270,947 266,958 258,490 243,207 235,075 212,806
Fluid Processing 322,163 274,466 274,469 263,423 266,523 224,173
--------------------------------------------------------------------------------------------
Total $1,224,101 $1,147,066 $1,087,285 $1,062,008 $1,072,433 $926,326
============================================================================================
</TABLE>
41
<PAGE>
Six-Year Financial History
Pall Corporation and Subsidiaries
<TABLE>
<CAPTION>
(In millions, except per share data and
number of employees) 2000 1999 1998 1997 1996 1995
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Results for the Year:
Sales $1,224.1 $1,147.1 $1,087.3 $1,062.0 $1,072.4 $ 926.3
Cost of sales 557.7 548.0 473.9 468.4 429.7 355.2
Selling, general and administrative expenses 403.9 406.0 392.8 376.9 378.8 338.7
Research and development 51.4 56.5 58.5 53.8 53.8 50.6
Other charges, net 8.6 64.7 19.2(c) 74.0 2.8(e) --
Interest expense, net 14.1 13.0 7.9 2.8 3.6 4.1
Earnings before taxes 188.4(a) 58.9(b) 135.0 86.1(d) 203.7 177.7
Income taxes 41.8 7.4 41.4 18.8 60.9 51.8
Accounting changes -- -- -- -- -- (0.8)(f)
Net earnings 146.6 51.5 93.6 67.3 142.8 125.1
Earnings per share:
Basic 1.18 0.41 0.75 0.53 1.14 1.00
Diluted 1.18 0.41 0.75 0.53 1.13 1.00
Dividends declared per share 0.66 0.64 0.61 0.54 0.47 0.41
Capital expenditures 66.5 71.2 85.1 88.6 88.5 74.3
Depreciation and amortization 72.0 74.8 73.1 62.8 57.8 50.6
--------------------------------------------------------------------------------------------------------------------------
Year-End Position:
Working capital $ 315.5 $ 185.9 $ 192.1 $ 291.6 $ 286.1 $ 264.4
Property, plant and equipment, net 503.8 507.0 520.6 504.0 498.0 460.5
Total assets 1,507.3 1,488.3 1,363.2 1,279.6 1,295.8 1,161.2
Long-term debt 223.9 116.8 111.5 62.1 54.4 74.3
Total liabilities 745.9 757.7 597.6 454.8 498.8 450.6
Stockholders equity 761.3 730.7 765.6 824.8 797.0 710.6
--------------------------------------------------------------------------------------------------------------------------
Other Ratios and Statistics:
Net earnings (excluding other charges
and accounting changes) as % of:
Sales 12.6 10.0 10.6 12.3 13.5 13.6
Average total assets 10.3 8.1 8.8 10.1 11.8 11.5
Average equity 20.6 14.8 14.4 15.5 19.2 18.9
Average shares outstanding:
Basic 123.8 124.3 125.1 126.3 125.1 124.6
Diluted 124.7 124.8 125.7 127.5 126.7 125.5
Equity per share $ 6.18 $ 5.88 $ 6.18 $ 6.48 $ 6.36 $ 5.70
Number of employees at year-end 8,800 8,600 8,900 8,500 8,500 7,300
Price range of stock during the year:
High $ 25.19 $ 26.63 $ 25.56 $ 28.25 $ 29.38 $ 24.00
Low $ 17.13 $ 15.75 $ 19.38 $ 20.75 $ 19.63 $ 15.75
==========================================================================================================================
</TABLE>
(a) Includes restructuring and other charges, net of $12.0 million (including
$3.4 million contained in cost of sales) or 6 cents per share (after pro
forma tax effect).
(b) Includes restructuring and other charges of $89.4 million (including $24.7
million contained in cost of sales) or 51 cents per share (after proforma
tax effect).
(c) Represents a one-time charge of $27.0 million or 22 cents per share (after
pro forma tax effect) to write-off in-process research and development
related to the Rochem acquisition, offset by $7.8 million or 4 cents per
share (after pro forma tax effect) of other income, net.
(d) Includes a charge of $95.9 million (including $21.9 million contained in
cost of sales) or 50 cents per share (after pro forma tax effect) related
to Gelman merger, restructuring and other charges.
(e) Represents a charge of $2.8 million or 1 cent per share (after pro forma
tax effect) related to Gelman's environmental remediation costs.
(f) Represents a $0.8 decrease in net earnings or 1 cent per share (after pro
forma tax effect) as a result of adopting SFAS No. 112 (Employer's
Accounting for Postemployment Benefits).
42
<PAGE>
Corporate Directory
Senior Officers
Eric Krasnoff
Chairman and Chief Executive Officer
Jeremy Hayward-Surry
President
John Adamovich
Treasurer and Chief Financial Officer
Senior Operating Officers
Steven Chisolm
Charles Grimm
Heinz Ulrich Hensgen
Clifton Hutchings
Paul Kohn
Neil MacDonald
John Miller
Akio Satake
Donald Stevens
Marcus Wilson
Samuel Wortham
Board of Directors
Abraham Appel
Daniel Carroll, Jr.
Ulric Haynes, Jr.
John Haskell, Jr.
Jeremy Hayward-Surry
Eric Krasnoff
Dr. Edwin Martin, Jr.
Katharine Plourde
Chesterfield Seibert
Heywood Shelley
Alan Slifka
Dr. James Watson
Corporate Officers
Dr. Joseph Adiletta
Dr. Leonard Bensch
David Berger
Jane Block
Thomas Bormann
Christopher Donegan
Terry Flack
Stephen Geibel
Dr. Thomas Gsell
Dr. Richard Gutman
Richard Haas
Abbott Hilelson
Patricia Iannucci
Sakae Isohata
Dr. Hyman Katz
William Palmer
Dr. John Pearson
Roberto Perez
Reed Sarver
Gregory Scheessele
Robert Simkins
Mark Sutter
Dr. Saied Tousi
Charles Wolowitz
Mary Ann Bartlett
Secretary and Assistant General Counsel
Gilbert Weiner
General Counsel
43
<PAGE>
Corporate Information
Corporate Headquarters
2200 Northern Blvd.
East Hills, New York 11548
Telephone: 516.484.5400
Toll Free: 1.800.645.6532
Fax: 516.484.3649
Principal Plants
Cortland and Long Island, New York
Fort Myers, New Port Richey, and Pensacola, Florida
Covina, California
Putnam, Connecticut
Northborough, Massachusetts
Ann Arbor, Michigan
Fajardo, Puerto Rico
Beijing, China
Hamburg, Germany
Tipperary, Ireland
Ascoli, Italy
Tsukuba, Japan
Ilfracombe, Newquay, Portsmouth and
Redruth, United Kingdom
Auditors
KPMG LLP, Melville, New York
Registrar & Transfer Agent
Equiserve Trust Company, N.A.
The transfer agent is responsible for shareholder records, changes of address,
stock transfers, changes of ownership, issuance of stock certificates, and
distribution of dividends and IRS Forms 1099.
Requests concerning these matters are most efficiently answered by contacting:
Equiserve Trust Company, N.A.
P.O. Box 8218
Boston, Massachusetts 02266-8218
Telephone: 1.800.633.4236
The papers used in this annual report were manufactured in mills that use Pall
filters in their paper machines.
Investor Relations
Investor relations inquiries should be directed to:
Pall Corporation
Diane Foster
25 Harbor Park Drive
Port Washington, New York 11050-4630
Telephone: 516.484.3600
Fax: 516.484.3649
E-mail: [email protected]
Requests for financial materials:
Telephone: 1.800.205.7255
Information on company results can be obtained through conventional press
coverage, SEC filings or through Pall's Internet web site at
http://www.pall.com.
Dividend Reinvestment Plan
Pall Corporation's Dividend Reinvestment Plan allows shareholders to reinvest
dividends and invest additional cash to purchase Pall Corporation Common Stock.
You must be a registered shareholder with a minimum of 50 shares in order to
participate. For more information, contact Equiserve Trust Company, N.A., Pall's
Transfer Agent, or Pall's Investor Relations Department.
Forward-Looking Statements
This annual report contains forward-looking statements that are based on current
Company expectations and are subject to a number of factors that could cause
actual results to differ materially. Such risks include, but are not limited to,
fluctuations in foreign exchange rates, regulatory approval and market
acceptance of new technologies, market demand, competitive pricing
considerations and global and regional economic conditions.
Trademarks
All product names appearing in bold capitals are trademarks owned by Pall
Corporation or one of its subsidiaries.
Design: Inc Design, incdesign.com
44
<PAGE>
[LOGO]
Pall Corporation
Corporate Headquarters
2200 Northern Boulevard
East Hills, NY 11548-1289 USA
800.645.6532 toll free
516.484.5400 phone
516.484.3649 fax
Filtration. Separation. Solution.(SM)
Visit us on the Web at www.pall.com
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Pall Corporation has offices and plants throughout the world in locations
including: Argentina, Australia, Austria, Belgium, Brazil, Canada, China,
France, Germany, Hong Kong, India, Indonesia, Ireland, Italy, Japan, Korea,
Malaysia, Mexico, the Netherlands, New Zealand, Norway, Poland, Puerto Rico,
Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, Thailand,
United Kingdom, United States and Venezuela. Distributors are located in all
major industrial areas of the world.
(C)Copyright 2000, Pall Corporation. Pall. [LOGO] are trademarks of Pall
Corporation. (R)Indicates a Pall trademark registered in the USA. "Select-A-FAX
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